The Effects of Sectoral Decline on the Employment Relationship

Abstract

This paper investigates tenure effects on employee retention under varying labor market conditions. We develop simple models of the likelihood of employer default (through early dismissals) on delayed payment and specific human capital contracts, and the predicted tenure pattern in these defaults under adverse conditions. The empirical implications of the models are investigated using competing risks analyses of tenure effects on recall and new job acceptance applied to layoff unemployment spell data from Waves XV and XVI (1982-83) of the Panel Study of Income Dynamics. The results indicate that adverse conditions (sectoral employment decline and unemployment) significantly reduce the positive tenure effect on recall probabilities in the 1983 data. This result is consistent with firm default on delayed payment contracts, but may also reflect the effect of technological changes that lower the value of firm-specific investments. The Effects of Sectoral Decline on the Employment Relationship Todd L. Idson Columbia University and Robert G. Valletta University of California at Irvine May, 1993 We thank Katharine Abraham, John DiNardo, Daniel Hamermesh, Julie Hotchkiss, Robert Hutchens, Edward Lazear, David Lilien, Jacob Mincer, and seminar participants at the University of Chicago, UC Irvine, UCLA, University of Maryland, and Yale for helpful comments. The Effects of Sectoral Decline on the Employment Relationship