Who Stays and Who Goes? Aggregate Shocks and Firm Employment

Abstract

We use administrative payroll data to examine how firms adjust employment in response to aggregate shocks. We use the COVID-19 pandemic as a laboratory. Exploiting within firm-state variation, we find that firms are more likely to lay off low-income and high-tenure employees before other classes of workers. This pattern disappears a few weeks into the pandemic, after which layoffs are more uniformly distributed. This pecking order of layoffs is most pronounced in low-skilled industries (e.g., retail trade) and in firms with high turnover costs. Firms are also more likely to rehire high-tenure employees that were laid off first. These results are consistent with theories which document that search frictions play an important role in determining firms' responses to aggregate shocks. To further evaluate the importance of search frictions in our setting, we examine whether expansion of unemployment benefits under the CARES Act increased the likelihood of layoffs. Consistent with search frictions, we find that even within the same income bucket, firms are more likely to lay off employees in states with more generous benefits.

Keywords: aggregate shocks, macro shocks, firm employment, employee composition

JEL Classification: E24, E32, G32, J21, J61, J64