In this paper we provide theoretical and empirical analyses of an
asymmetric-information model of layoffs in which the current employer is
better informed about its workers’ abilities than prospective employers
are. The key feature of the model is that when firms have discretion with
respect to whom to lay off, the market infers that laid-off workers are of
low ability. Since no such negative inference should be attached to
workers displaced in a plant closing, our model predicts that the post-
displacement wages of otherwise observationally equivalent workers will be
higher for those displaced by plant closings than for those displaced by
layoffs. A simple extension of our model predicts that the post-
displacement unemployment duration of otherwise observationally equivalent
workers will be lower for those displaced by plant closings than for those
displaced by layoffs.
In our empirical work, we use data from the Displaced Workers Supplements
in the January l984 and 1986 Current Population Surveys. For our whole
sample, we find that the evidence (with respect to both re-employment wages
and post-displacement unemployment duration) is consistent with the idea
that laid-off workers are viewed less favorably by the market than are
those losing jobs in plant closings. Furthermore, our findings are much
stronger for workers laid-off from jobs where employers have discretion
over whom to lay off, and much weaker for workers laid-off from jobs where
employers have little or no discretion over whom to lay off.