Working Paper: NBER ID: w0864
Authors: Robert E. Hall; Edward P. Lazear
Abstract: Excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements: the specific nature of worker-firm relations creates a situation of bilateral monopoly. Institutions which have arisen to avert the associated inefficiency cannot mimic the separation decisions of a perfect-information, first-best allocation rule. Simple employment rules based on predetermined or indexed wages are in many cases the most desirable among the class of feasible employment arrangements. More complicated contracts which seem to deal more effectively with turnover issues are either infeasible because of informational requirements or create adverse incentives on some other dimension.
Keywords: Labor Market; Layoffs; Quits; Employment Contracts; Demand Fluctuations
JEL Codes: J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional arrangements (D02) | excessive layoffs during downturns (J63) |
| institutional arrangements (D02) | excessive quits during upturns (E32) |
| predetermined wage contracts (J33) | inefficient layoffs when demand falls (J63) |
| predetermined wage contracts (J33) | excessive quits when conditions improve (J63) |
| absence of complete information (D89) | inefficiencies in labor market outcomes (J48) |
| predetermined wage contracts (J33) | excess sensitivity of separations to demand fluctuations (E32) |
| complicated contracts (D86) | adverse incentives (D82) |