The Layoff Rat Race

26 Pages Posted: 10 Feb 2010

See all articles by Dan Bernhardt

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Steeve Mongrain

Simon Fraser University (SFU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2009-04

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.

Suggested Citation

Bernhardt, Dan and Mongrain, Steeve, The Layoff Rat Race (2009-04). Scandinavian Journal of Economics, Vol. 112, Issue 1, pp. 185-210, March 2010. Available at SSRN: https://ssrn.com/abstract=1550489 or http://dx.doi.org/10.1111/j.1467-9442.2009.01579.x

Dan Bernhardt (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Steeve Mongrain

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3547 (Phone)
604-291-5944 (Fax)

HOME PAGE: http://www.sfu.ca/~mongrain/

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