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Downsizing, job insecurity and firm reputation

  • Doh-Shin Jeon
  • Joel Shapiro

This paper studies how firms make layoff decisions in the presence of adverse shocks. In this uncertain environment, workers' expectations about their job security affect their on-the-job performance. This productivity effect on job insecurity forces firms to strike a balance between laying off redundant workers and maintaining survivors' commitment when deciding on the amount and timing of downsizing. This framework offers an explanation of conservative employment practices (such as zero or reduced layoffs) based on firms having private information about their future profits. High retention rates and wages can signal that the firm has a bright future, boosting workers' confidence. Moreover, the model provides clear predictions about when waves of downsizing will occur as opposed to one-time massive cuts.

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File URL: https://econ-papers.upf.edu/papers/795.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 795.

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Date of creation: Nov 2004
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Handle: RePEc:upf:upfgen:795
Contact details of provider: Web page: http://www.econ.upf.edu/

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