The Timing and Size of Layoffs: Theory and Evidence
Mass layoffs affect hundreds of thousands of U.S. workers each year and are an important issue for labor market policy both in recession and non-recession times. This thesis studies the causes and consequences of abrupt or "lumpy" labor adjustments at the firm level. The first chapter evaluates the timing, size, and possible determinants of large layoffs by constructing a novel panel dataset that matches the layoff announcements of all U.S. employers in 2007-2012 to other publicly available firm-level information. Empirical analysis of this dataset shows that layoffs are lumpy in time and delayed with respect to previous changes in company-level financial conditions. It also finds that lumpy adjustments appear to be common in high-wage industries and not clearly related to the extent of industry unionization.The second chapter develops a theoretical model to show how the adverse effects of layoffs on workers' morale and incentives can act as an endogenous cost of labor adjustment. The model features a firm that has private information about idiosyncratic demand shocks and relies on workers' effort for production. Workers do not observe the shock to the firm's demand but observe the firm's choice of employment, which therefore operates as a signal. The equilibrium is characterized by partial pooling in which the firm hoards labor to maintain workers' incentives for effort. In a dynamic setting, the firm initially underadjusts in response to small negative shocks and conducts a mass layoff only after business conditions deteriorate past a certain point. When workers' effort entails a choice of whether to search for a new job, the model further predicts that workers are more likely to quit after a large idiosyncratic layoff episode at their employer.This prediction is examined empirically in the third chapter, based on microdata from the BLS Job Openings and Labor Turnover Survey. Using hiring rate measures to control for external labor market conditions, I find that voluntary quit rates at an establishment are higher during and immediately after layoffs. This supports the prediction from the second chapter that layoffs weaken the attachment of remaining workers to their employer.
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