Seniority-based layoffs as an incentive device

Joseph Ritter and Lowell Taylor

No 1998-006, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper provides a simple economic rationale for two elements that often appear - implicitly or explicitly - in firms' personnel policies. When firms reduce their labor input they often (i) lay off a few individuals rather than adjust work hours, and (ii) make retention decisions on the basis of seniority. We show that in a stochastic environment, a seniority-based layoff policy can have the effect of making the job valuable to a worker over most of her career. This provides work-life incentives using a mechanism similar to Lazear's well known model of upward-sloping wage profiles. Firms reduce their workforce by adjusting employment rather than work hours because layoffs are an integral part the incentive scheme.

Keywords: Labor; market (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (2)

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DOI: 10.20955/wp.1998.006

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