This paper studies a possible link between two trends
that have affected the labor market over the last decade: increases
in wrongful termination litigation and increasing frequency of mass
layoffs. We model the displacement strategy of a firm faced with
concave displacement costs and employees who vary in productivity.
The firm has some periods of "layoffs," where it displaces a relatively
large group, and other periods where it engages in selective "firings"
of only the least productive employees. We show that layoffs and
firings are substitutes and that the set of steady-state policies
shifts in the direction of smaller firings and larger layoffs as
the cost of firings increases. We explore the relationship between
displacement costs and layoff size by considering potential effects
of the Civil Rights Act (CRA) of 1991. By increasing most firms'
exposure to wrongful termination lawsuits, this legislation made
displacements of smaller groups of workers more costly without proportionately
affecting the costs of large layoffs. Using data from the Survey
of Income and Program Participation (SIPP), we explore the effects
of CRA91 using variation in protected status (specifically, race),
state Fair Employment Laws, age, and employer size. We find evidence
suggesting that CRA91 affected firms' choices about how to displace
workers and had especially strong effects on the firing rates of
black men.
Paul Oyer, Department
of Management and Strategy, Kellogg Graduate School of Management,
Northwestern University Scott Schaefer, Department of Management
and Strategy, Kellogg Graduate School of Management, Northwestern
University
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