The layoff rat race

Dan Bernhardt, Steeve Mongrain

Research output: Contribution to journalArticle

Abstract

We investigate how discretionary investments in general and specific human capital are affected by the possibility of layoffs. After investments are made, firms may have to lay off workers, and will do so in inverse order of the profit that each worker generates. Greater skill investments, especially in specific human capital, contribute more to a firm's bottom line, so that workers who make those investments will be laid off last. We show that as long as workers' bargaining positions are not too weak, workers invest in specific human capital in order to reduce layoff probabilities. Indeed, workers over-invest in skill acquisition from a social perspective whenever their bargaining power is strong enough, even though they only receive a share of any investment. More generally, we characterize how equilibrium skill investments are affected by the distribution of worker abilities within firms, the probability that a firm will downsize, and the distribution of employment opportunities in the economy.

Original languageEnglish (US)
Pages (from-to)185-210
Number of pages26
JournalScandinavian Journal of Economics
Volume112
Issue number1
DOIs
StatePublished - Mar 1 2010

Keywords

  • Bargaining
  • Human capital
  • J41
  • J63
  • J65
  • Layoffs
  • Specific skills
  • Unemployment

ASJC Scopus subject areas

  • Economics and Econometrics

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