Layoff and Recall Impacts of Stocks of Rehirables

Abstract

With the advent of turnover data, Economists began to view unemployment as a turnover phenomenon. When unemployment rates were below 4% in the late 1960s, discussions of unemployment focused on voluntary separations, the search for new employment, and factors influencing the expected duration of job search. As unemployment levels rose in the 1970s, the supply side model of search unemployment initially developed to analyze voluntary separations was used to study layoff related unemployment. Within the framework of search unemployment models, Feldstein [4] noted that Unemployment Insurance benefits reduced search costs and thereby increased the expected duration of search and hence unemployment. Measurement of the magnitude of this effect has been attempted by Holen & Horowitz [8], Marston [9], Ehrenberg and Oaxaca [3], and Chiswick [1]. This paper addresses the question of the nature of an employer's response to the behavior of laid-off workers. It is shown below that an employer will tend to layoff more readily and postpone rehiring workers when the employer expects to be able to recall those workers. Thus employers respond to lengthened unemployment durations of their workers by increasing layoffs or postponing recalls. Consequently those studies which focus only on the supply side underestimate the effects of Unemployment Insurance on unemployment by failing to consider the compounding effect of employer responses.' To determine an employer's response to the behavior of laid-off workers, the factors influencing employers' layoff and recall decisions are approached directly. In addition to the standard factors of product demand and wage rates, the costs of layoffs, recalls, and new hires are considered. Assuming a cost differential between recalls and new hires due to firm specific human capital, the paper concentrates on how layoff and recall decisions are influenced by the stock of rehirables, the pool of previously laid-off workers available for recall. The results obtained in this manner are consistent with those obtained elsewhere [5]. In Section II, a formal model is developed to examine the effects of employment adjust-