Layoffs and Litigation

41 Pages Posted: 13 Sep 1998

See all articles by Paul Oyer

Paul Oyer

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Scott Schaefer

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 1998

Abstract

This paper studies a possible link between two trends that have affected the labor market over the last decade: increases in wrongful termination litigation and increasing frequency of mass layoffs. We model the displacement strategy of a firm faced with concave displacement costs and employees who vary in productivity. The firm has some periods of "layoffs," where it displaces a relatively large group, and other periods where it engages in selective "firings" of only the least productive employees. We show that layoffs and firings are substitutes and that the set of steady-state policies shifts in the direction of smaller firings and larger layoffs as the cost of firings increases. We explore the relationship between displacement costs and layoff size by considering potential effects of the Civil Rights Act (CRA) of 1991. By increasing most firms' exposure to wrongful termination lawsuits, this legislation made displacements of smaller groups of workers more costly without proportionately affecting the costs of large layoffs. Using data from the Survey of Income and Program Participation (SIPP), we explore the effects of CRA91 using variation in protected status (specifically, race), state Fair Employment Laws, age, and employer size. We find evidence suggesting that CRA91 affected firms' choices about how to displace workers and had especially strong effects on the firing rates of black men.

JEL Classification: D21, J21, K31, M12

Suggested Citation

Oyer, Paul and Schaefer, Scott, Layoffs and Litigation (July 1998). Available at SSRN: https://ssrn.com/abstract=112052 or http://dx.doi.org/10.2139/ssrn.112052

Paul Oyer (Contact Author)

Stanford Graduate School of Business ( email )

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Scott Schaefer

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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