Layoff Costs Research Articles

Layoff Costs and Learning About Employer Financial Distress

Layoff Costs and Learning About Employer Financial Distress

ISM approach to model financial risks in Indian KPO organization

Globalization has entered a new phase due to significant advancements in technology. This progress has allowed organizations to reduce costs while enhancing their market responsiveness, thus gaining a competitive edge. Nowadays, organizations prioritize knowledge process outsourcing (KPO) as a crucial element in their strategies, particularly in the service sector. However, research indicates that several challenges are negatively impacting the performance of the supply chain network when it comes to KPO. One major challenge is the financial risk associated with this environment. Various factors, such as switching costs, adaptation costs, and layoff costs, influence this financial risk. The aim of this research is to comprehend and identify the interconnectedness of these financial risk factors, which can affect the operational performance of KPO. The authors have meticulously reviewed relevant literature to identify these financial risk factors. Based on this subject matter, an integrated model has been constructed using Interpretive Structural Modeling (ISM) to address the finance-related challenges impacting KPO. Additionally, the Cross-Impact Matrix analysis evaluates the dependency and driving power of financial challenges. This analysis assists decision-makers in classifying and identifying important factors, as well as understanding the direct and indirect effects of each factor on operations related to KPO. The results indicate that switching costs, disputes & litigation, and measurement problems have strong driving power and weak dependency, making them independent factors. By mitigating these independent factors, the overall performance of the model can be improved.

Cross-phenomenon restrictions: Unemployment effects of layoff costs and quit turbulence

Cross-phenomenon restrictions associated with returns to labor mobility can inform calibrations of productivity processes in macro-labor models. We exploit how returns to labor mobility influence effects on equilibrium unemployment of changes in (a) layoff costs, and (b) distributions of skill losses coincident with quits (“quit turbulence”). Returns to labor mobility intermediate both effects. Ample labor reallocations observed across market economies that have different layoff costs imply that a turbulence explanation of trans-Atlantic unemployment experiences is robust to adding plausible quit turbulence.

Fiscal multipliers and job-protection regulation

We study, both theoretically and empirically, how labor market regulation affects fiscal multipliers. We focus on the stringency of employment protection legislation, a prominent source of rigidity in European labor markets. First, using a small-open economy model that features labor-market search-and-matching frictions and nominal rigidities, we show that an increase in government spending has larger output effects when firing costs are lower. The importance of layoff costs for the public spending multiplier is larger in the absence of exchange rate adjustment and in a recession. Second, we confirm these findings empirically using a panel of 26 advanced countries over the period 1970–2013. The effect of job protection on fiscal multipliers is both statistically and economically significant.

Influences of Prior Period Revenue, Perceived Psychological Costs, and Manager Agency on Labor Cost Reduction Decisions Following a Current Period Revenue Decline

This experimental study investigates whether prior period sales declines, the psychological costs of layoffs, and manager psychological agency (self-focus) influences managers’ decisions to cut labor costs in a “sticky cost” context. Using 149 experienced managers recruited through CloudResearch as participants, we manipulate prior period sales changes (increase versus decrease) and perceived psychological costs of employee layoffs (higher in a “family” culture; lower in a “distant” culture) to investigate managers’ labor downsizing choices in the face of pressure to maintain income due to a current period sales decline. We also measure manager agency to examine its influence on labor cost reduction decisions. Findings suggest that managers are more likely to lay off employees when facing successive sales decreases, and less likely to do so when psychological costs are high and prior year sales increased. In addition, we find that managers higher in agency are more likely to cut employees in order to achieve a short-term bonus. However, when given the choice to reduce labor costs using pay cuts or layoffs, more-agentic managers favor pay cuts over layoffs, thus retaining labor resources (consistent with empire building). We discuss the implications of our results for practice and future research into asymmetric cost behavior.

The Detrimental Effect of Job Protection on Employment: Evidence from France

According to French law, employers have to pay at least six months salary to employees whose seniority exceeds two years in case of unfair dismissal. We show, relying on data, that this regulation entails a hike in severance payments at two-year seniority which induces a significant rise in the job separation rate before the two-year threshold and a drop just after. The layoff costs and its procedural component are evaluated thanks to the estimation of a search and matching model which reproduces the shape of the job separation rate. We find that total layoff costs increase with seniority and are about four times higher than the expected severance payments at two years of seniority. Counterfactual exercises show that the fragility of low-seniority jobs implies that layoff costs reduce the average job duration and increase unemployment for a wide set of empirically relevant parameters.

The Fundamental Surplus

To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, by assuming fixed matching costs, or by positing government-mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. Business cycles and welfare state dynamics of an entire class of reconfigured matching models all operate through this common channel. (JEL E23, E24, E32, J24, J31, J41, J63)

Taxation of Temporary Jobs: Good Intentions with Bad Outcomes?

This paper analyzes the consequences of the taxation of temporary jobs recently introduced in several European countries to induce firms to create more open-ended contracts and to increase the duration of jobs. The estimation of a job search and matching model on French data shows that the taxation of temporary jobs does not reach its objectives: it reduces the mean duration of jobs and decreases job creation, employment and welfare of unemployed workers. We find that a reform introducing an open-ended contract without layoff costs for separations occurring at short tenure would have opposite effects.

Firing tax vs severance payments – an unequal comparison

Purpose– The purpose of this paper is to compare two elements of lay-off costs in a dynamic model of the labor market and analyze the differences for business cycle dynamics and welfare.Design/methodology/approach– The paper builds a general equilibrium Real Business Cycle model and introduces firing costs and severance payments. Labor market frictions are assumed to follow the famous search and matching approach.Findings– The paper finds that firing costs imply a higher volatility over the cycle and have stronger negative welfare effects. Severance payments have a lower volatility, reduce unemployment, and reduce welfare by a smaller amount.Practical implications– Policy reforms should be aimed to use severance payments and reduce the ring cost component of lay-off costs.Originality/value– Increasing welfare and a more stable business cycle could be supported by using severance payments instead of firing costs.

A multi-periods production–inventory model with capacity constraints for multi-manufacturers – A global optimality in intuitionistic fuzzy environment

The paper deals with a managerial issue of a production plant having multi-manufacturers. The plant has its own multiple shop/delivery system and different machines which run in several periods. For a long lasting commodities, the total demand at each shop are taking into a vital role in the whole entire process of the plant. The plant needs to increase production level (hiring), reducing production level (layoff) and over-time scheduling has on the basis of forecasted demands at different periods of different shops. Main objective of the plant is to determine optimal regular and overtime production lots per periods under limited capacities by minimizing cost function that consists of regular and overtime production costs, inventory cost, hiring and layoff costs. A crisp model of the concerned linear programming problem (L.P.P.) with multiple constraints has been discussed first. Then, the cost function is optimized for three different fuzzy as well as intuitionistic fuzzy assumptions. Score function followed by ranking index method is used to optimize the function. Moreover, a comparison between general fuzzy optimization (GFO) and intuitionistic fuzzy optimization (IFO) has been done by some numerical examples. Finally, sensitivity analysis and graphical illustrations are made to justify the proposed model.

Layoff Costs and Efficiency with Asymmetric Information

Layoff Costs and Efficiency with Asymmetric Information

Two Questions about European Unemployment

A general equilibrium search model makes layoff costs affect the aggregate unemployment rate in ways that depend on equilibrium proportions of frictional and structural unemployment that in turn depend on the generosity of government unemployment benefits and skill losses among newly displaced workers. The model explains how, before the 1970s, lower flows into unemployment gave Europe lower unemployment rates than the United States and also how, after 1980, higher durations have kept unemployment rates in Europe persistently higher than in the United States. These outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to bigger skill losses among newly displaced workers. Those bigger skill losses also explain why U.S. workers have experienced more earnings volatility since 1980 and why, especially among older workers, hazard rates of gaining employment in Europe now fall sharply with increases in the duration of unemployment.

Temporary Layoffs and Unemployment Insurance: Is Experience Rating Desirable?

Abstract This paper explores how the introduction of an experience-rated system of unemployment insurance affects employment and welfare in a model where implicit contracts between firms and workers give rise to wage rigidities and unemployment. In the literature, it has been argued that experience-rated systems of unemployment insurance may reduce long-term employment as firms anticipate the higher costs of layoffs implied by experience rating. Our analysis shows that the introduction of experience rating may increase or decrease long-term employment but it unambiguously raises welfare.

Experience Rating versus Employment Protection Laws in a Model where Firms Monitor Workers*

AbstractWhile layoff costs in the U.S. are mostly due to experience‐rated unemployment insurance, layoff costs in European labour markets are primarily a consequence of employment protection laws. In this paper we compare the effects of experience rating and employment protection laws on employment and welfare in a model where unemployment arises due to efficiency wage setting and where labour turnover is inefficiently high. We show that a revenue‐neutral introduction of experience rating reduces labour turnover and increases employment and welfare. The introduction of employment protection laws may also reduce labour turnover but employment declines.

Financement des politiques du marché du travail et protection de l'emploi

Labour Market Policies Budget and Job Protection. This article focuses on the links between the form of employment protection and two elements of the labour market policies budget : unemployment benefits and hiring subsidies. We study the complementarities of such policies in a standard matching model of employment. In our model two types of employment protection reforms are investigated : a reform of the existing job protection policies in Europe (regulatory costs of lay-offs ) and the introduction of a US-style “ experience rating scheme ”. Our simulations show that the design of job protection is a crucial parameter in determining the effect of these policies on unemployment and interacts strongly with the unemployment benefit financing policy. The results suggest that the complementarities between job protection and unemployment benefit policies depend heavily on the precise form of the employment protection.

Layoff costs, tenure, and the labor market

This paper investigates the effects of layoff costs on the labor market. In contrast to the previous literature, it lets firing costs be a function of tenure. The model shows that when layoff costs are an increasing function of tenure, stricter job security might increase job destruction and unambiguously affect the unemployment rate.

How do Lay‐off Costs Affect Employment?

General equilibrium analyses of lay-off costs have had mixed messages on the implications for employment. This paper brings out the economic forces at work and sheds light on the disparate results. We explain why lay-off costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how lay-off costs are assumed to enter the bargaining process. A common concern is that labour market rigidities such as lay-off costs are responsible for high European unemployment (OECD, 1994a). As documented by Emerson (1988) and Lazear (1990), lay-off costs are particularly burdensome in Europe. This paper explores a few general equilibrium models to see what kind of relationship there is between lay-off costs and an economy's level of employment. The analysis focuses solely on lay-off costs in isolation from other European labour market policies that might also influence unemployment rates such as minimum wages and generous unemployment compensation. As pointed out by Lazear (1990), any mandated severance pay can be offset by

Voluntary environmental agreements: bargaining over more than emissions

This paper analyses voluntary agreements (VA) between public agencies and polluting industries. It is shown that voluntary agreements provide gains both for governments and for industries relative to the use of emission licenses and can thus be seen as both rational and self-enforcing. The condition for this conclusion is that the regulator has preferences over labour participation rates due to the presence of layoff costs. The gains for both parties in signing an agreement are highest when the industry is one with high productivity, low wages, and low environmental costs, while the effects on gains differ across the two negotiating parties for high output elasticities with respect to emissions and labour.

Temporary Layoffs and Unemployment Insurance: Is Experience Rating Desirable?

This paper explores how the introduction of an experience rated system of unemployment insurance affects employment and welfare in a model where implicit contracts between firms and workers give rise to wage rigidities and unemployment. In the literature, it has been argued that experience rated systems of unemployment insurance may reduce long term employment as firms anticipate the higher costs of layoffs implied by experience rating. Our analysis shows that, despite the higher costs of layoffs, the introduction of experience rating may increase long term employment. Moreover, it unambiguously increases welfare.

Fixed-term contracts and the dynamics of labour demand

We estimate a model of labour demand that accounts for dynamics arising from the relative costs of hiring and firing workers on either indefinite-term contract (ITC) or fixed-term contract (FTC). We use a panel of 1000 French firms, for which we can measure the number of entries and exits for each type of contract between 1988 and 1992. Our estimates suggest that (1) it is much more costly to lay off workers under ITC than to hire them; (2) it is much less costly to adjust the number of FTC than to adjust the number of ITC; (3) the asymmetry between hiring and layoff costs is more important for non-production than for production workers.