A Signaling Model of Temporary Layoffs

Posted: 4 Jul 2009

See all articles by Núria Rodríguez-Planas

Núria Rodríguez-Planas

City University New York (CUNY), Queens College; IZA Institute of Labor Economics

Date Written: July 2009


Temporary layoffs are an important feature of North American and European labor markets. This article presents an asymmetric information model of layoffs that explicitly considers the possibility of recall. In this model, high-productivity workers are more likely to be recalled to their former employer and may choose to remain unemployed rather than to accept a low-wage job. In this case, unemployment can serve as a signal of productivity. I present conditions under which all equilibria satisfying the Cho-Kreps intuitive criterion must entail (some) unemployment. Because of productivity gains from valuable job-matches, unemployment may be socially desirable for those workers who were particularly productive with their former employer. If so, a re-employment bonus that encourages low-productivity workers to find a new job but does not discourage high-productivity workers from waiting for recall is an optimal policy from societal perspective. Equity properties of such a policy and its cost effectiveness are analysed.

JEL Classification: J63, J64, J65

Suggested Citation

Rodriguez-Planas, Nuria, A Signaling Model of Temporary Layoffs (July 2009). Oxford Economic Papers, Vol. 61, Issue 3, pp. 566-585, 2009, Available at SSRN: https://ssrn.com/abstract=1429226 or http://dx.doi.org/gpp001

Nuria Rodriguez-Planas (Contact Author)

City University New York (CUNY), Queens College ( email )

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