Asymmetric Information in the Labor Market: New Evidence on Layoffs, Recalls, and Unemployment

Abstract:     
In the United States, many laid-off workers are recalled to their former employer. I develop an asymmetric information model of layoffs in which high productivity workers are more likely to be recalled and may choose to remain unemployed rather than accept a low-wage job. In this case, unemployment can serve as a signal of productivity, and unemployment duration may be positively related to post-laid-off wages even among workers who are not recalled. In contrast, since workers whose plant closed cannot be recalled, longer unemployment duration should not have a positive signaling benefit for such workers. Analysis of the data from January 1988-1992 Displaced Workers Supplements to the Current Population Survey reveals that the wage/unemployment duration relation differs between the two groups in the predicted way, and finds evidence consistent with asymmetric information in the U.S. labor market.

Number of Pages in PDF File: 62

JEL Classification: J60, J30

working papers series