The Determinants of Dismissals, Quits, and Layoffs: A Multinomial Logit Approach

Abstract

In efficiency wage models, workers' productivity depends positively on the wage, giving firms an incentive to pay wages above their market-clearing level. Two models in this literature are the shirking model of Shapiro and Stiglitz [12] and Bowles [1] and the turnover cost model of Stiglitz [13], Schlicht [11], and Salop [10]. In the shirking model, a higher wage and a higher unemployment rate raise the cost of losing one's job, thereby discouraging workers from shirking and increasing their effort. In the turnover cost model, a higher wage reduces quits and thus lowers the firm's cost of hiring and training new workers. Given the role of separations in efficiency wage models, it is important to understand the determinants of separations. This study uses data on individual workers to examine the determinants of dismissals, quits, and layoffs within the first six months of a hire, paying particular attention to dismissals because of the prominence of the shirking model in the efficiency wage literature. The purposes of this study are to test whether higher unemployment lowers dismissals, as predicted by the shirking model, and to examine the effect of firm variables related to the costs of monitoring and shirking on the probability of a dismissal. In addition, this study provides insight into the effects of firm characteristics and worker characteristics on dismissals, quits, and layoffs.'