Downsizing, Job Insecurity, and Firm Reputation

Doh-Shin Jeon and Joel Shapiro

No 144, Working Papers from Barcelona School of Economics

Abstract: This paper studies how firms make layoff decisions in the presence of adverse shocks. In this uncertain environment, workers' expectations about their job security affect their on-the-job performance. This productivity effect of job insecurity forces firms to strike a balance between laying off redundant workers and maintaining survivors' commitment when deciding on the amount and timing of downsizing. This framework offers an explanation of conservative employment practices (such as zero or reduced layoffs) based on firms having private information about their future profits. High retention rates and wages can signal that the firm has a bright future, boosting workers' confidence. Moreover, the model provides clear predictions about when waves of downsizing will occur as opposed to one-time massive cuts.

Keywords: Downsizing; layoffs; employment policies (search for similar items in EconPapers)
JEL-codes: D21 D82 J21 J23 (search for similar items in EconPapers)
Date: 2015-09
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Working Paper: Downsizing, job insecurity and firm reputation (2004)
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