Re-Employment Bonuses in a Signalling Model of Temporary Layoffs
18 Pages Posted: 2 Sep 2004
Date Written: February 2004
Temporary layoffs are an important feature of the United States labor market. If these employer-employee relationships exist because of valuable job-matches, unemployment among high-productivity laid-off workers may be optimal from societal perspective. However, because of asymmetric information, low-productivity workers may behave strategically, and choose unemployment instead of low-wage jobs, resulting in an inefficient level of unemployment. This paper shows that in such cases, a re-employment bonus may give the correct incentives to laid-off workers and achieve the optimal equilibrium. The paper analyzes the equity properties of such a policy and its cost effectiveness. Finally, the model fits the data and offers several policy implications.
Keywords: temporary layoffs, recall expectations, unemployment, signalling and re-employment bonus demonstrations
JEL Classification: J63, J64, J65
Suggested Citation: Suggested Citation