Mandatory Advance Notice of Layoff: Evidence and Efficiency Considerations

63 Pages Posted: 2 Aug 2021

See all articles by Jonas Cederlöf

Jonas Cederlöf

University of Edinburgh

Peter Fredriksson

Uppsala University - Department of Economics; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Arash Nekoei

Stockholm University - Institute for International Economic Studies (IIES)

Date Written: 2021

Abstract

We investigate a prevalent, but understudied, employment protection policy: mandatory advance notice (MN), requiring employers to notify employees of forthcoming layoffs. MN increases future production, as notified workers search on the job, but reduces current production as they supply less effort. Our theoretical model captures this trade-off and predicts that MN improves production efficiency by increasing information sharing, whereas large production losses can be avoided by worker-firm agreements on side-payments – severance pay – in lieu of MN. We provide evidence of such severance increases in response to an extension of MN using novel Swedish administrative data. We then estimate the production gain of MN: extending the MN period leads to shorter non-employment duration and higher reemployment wages, plausibly driven by on-the-job search. Using variation in notice duration across firms, we estimate the productivity loss of notice. The estimates of benefits and costs suggest that MN has a positive net impact on production, offering an empirically-grounded efficiency argument for mandating notice.

JEL Classification: J310, J330, J630, J680

Suggested Citation

Cederlöf, Jonas and Fredriksson, Peter and Nekoei, Arash, Mandatory Advance Notice of Layoff: Evidence and Efficiency Considerations (2021). CESifo Working Paper No. 9208, Available at SSRN: https://ssrn.com/abstract=3896143 or http://dx.doi.org/10.2139/ssrn.3896143

Jonas Cederlöf (Contact Author)

University of Edinburgh ( email )

30 Buccleuch Place
Edinburgh, Scotland EH8 9JT
United Kingdom

Peter Fredriksson

Uppsala University - Department of Economics ( email )

SE-75120 Uppsala
Sweden
+46 18 471 7079 (Phone)
+46 18 471 1478 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Arash Nekoei

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

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