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Displacement, Asymmetric Information, and Heterogeneous Human Capital

Author

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  • Luojia Hu

    (Northwestern University)

  • Christopher Taber

    (Northwestern University)

Abstract

In a seminal paper, Gibbons and Katz (1991) develop and empirically test an asymmetric information model of the labor market. The model predicts that wage losses following displacement should be larger for layoffs than for plant closings, which was borne out by data from the Displaced Workers Survey (DWS). In this paper, we take advantage of many more years of DWS data to examine how the difference in wage losses across plant closings and layoffs varies with race and gender. We find that the differences between white males and the other groups are striking and complex. The “lemons effect” of layoffs holds for white males, as in the Gibbons-Katz model, but not for the other three demographic groups (white females, black females, and black males). These three all experience a greater decline in earnings at plant closings than at layoffs. This results from two reinforcing effects. First, plant closings have substantially more negative effects on minorities than on whites. Second, layoffs seem to have more negative consequences for white men than the other groups. These findings suggest that the Gibbons-Katz asymmetric information model is not sufficient to explain all of the data. We augment the model with heterogeneous human capital and show that this model can explain the findings. We also provide some additional evidence suggestive that both asymmetric information and heterogeneous human capital are important. In support of both explanations, we demonstrate that the racial and gender effects are surprisingly robust to region, industry, and occupation controls. To look at the asymmetric information, we make use of the Civil Rights Act of 1991, which induced employers to lay off “protected” workers in mass layoffs rather than fire them for cause. As a result, relative to whites, a layoff would be a more negative signal for blacks after 1991 than before. If information is important, this would in turn imply that blacks experience a relatively larger loss in earnings at layoffs after 1991 than prior; and that’s what we find in the data. In addition, as further evidence for heterogeneous human capital, we document for the first time in the literature that the two types of layoffs reported in the DWS data, namely layoffs due to “slack work” and “position abolished,” have very different features when compared to plant closings. Finally, we simulate our model and show that it can match the data.

Suggested Citation

  • Luojia Hu & Christopher Taber, 2007. "Displacement, Asymmetric Information, and Heterogeneous Human Capital," Upjohn Working Papers and Journal Articles 07-136, W.E. Upjohn Institute for Employment Research.
  • Handle: RePEc:upj:weupjo:07-136
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    References listed on IDEAS

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    1. Gibbons, Robert & Katz, Lawrence F, 1991. "Layoffs and Lemons," Journal of Labor Economics, University of Chicago Press, vol. 9(4), pages 351-380, October.
    2. Becker, Gary S., 1971. "The Economics of Discrimination," University of Chicago Press Economics Books, University of Chicago Press, edition 2, number 9780226041162.
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    Citations

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    Cited by:

    1. Araki, Shota & Kawaguchi, Daiji & Onozuka, Yuki, 2016. "University prestige, performance evaluation, and promotion: Estimating the employer learning model using personnel datasets," Labour Economics, Elsevier, vol. 41(C), pages 135-148.
    2. Roland G. Fryer, Jr. & Devah Pager & Jörg L. Spenkuch, 2013. "Racial Disparities in Job Finding and Offered Wages," Journal of Law and Economics, University of Chicago Press, vol. 56(3), pages 633-689.
    3. Kunze, Astrid & Troske, Kenneth R., 2012. "Life-cycle patterns in male/female differences in job search," Labour Economics, Elsevier, vol. 19(2), pages 176-185.
    4. J. Meekes & W.H.J. Hassink, 2016. "The role of the housing market in workers’ resilience to job displacement after firm bankruptcy," Working Papers 16-10, Utrecht School of Economics.
    5. Emiko Usui & Seik Kim, 2013. "Employer Learning, Job Mobility, and Wage Dynamics," 2013 Meeting Papers 912, Society for Economic Dynamics.
    6. repec:bla:indres:v:56:y:2017:i:4:p:688-722 is not listed on IDEAS
    7. Meekes, Jordy & Hassink, Wolter, 2017. "The Role of the Housing Market in Workers' Resilience to Job Displacement after Firm Bankruptcy," IZA Discussion Papers 10894, Institute for the Study of Labor (IZA).
    8. Seik Kim & Emiko Usui, 2012. "Employer Learning, Job Changes, and Wage Dynamics," Working Papers UWEC-2012-01, University of Washington, Department of Economics.
    9. Jens Mohrenweiser & Gabriele Wydra-Somaggio & Thomas Zwick, 2017. "Information Advantages of Training Employers Despite Credible Training Certificates," Economics of Education Working Paper Series 0121, University of Zurich, Department of Business Administration (IBW), revised Apr 2017.
    10. Siddique, Zahra, 2008. "Caste Based Discrimination: Evidence and Policy," IZA Discussion Papers 3737, Institute for the Study of Labor (IZA).
    11. Rao, Neel, 2016. "Asymmetric information and search frictions: A neutrality result," Economics Letters, Elsevier, vol. 147(C), pages 138-141.

    More about this item

    Keywords

    human capital; plant closings; layoffs; sex; gender; race;

    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • J7 - Labor and Demographic Economics - - Labor Discrimination

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