Working Paper

What Quits and Layoffs Reveal About the Business Cycle

Abstract: We introduce monthly CPS series that classify every separation by reason (quit or layoff) and destination (unemployment or non-participation), and use them to confront the workhorse model of labor market flows. The standard model overproduces quits, sends laid-off workers to unemployment when a third of them leave the labor force, and gets the cyclical direction of labor force attachment backwards. Adding selective layoffs and random quits repairs these facts and overturns what labor supply does over the cycle: a recession is partly stabilized from within. Two channels buffer employment and amplify unemployment: (i) labor supply as marginal workers hoard their jobs and the displaced keep searching, and (ii) selection as layoffs shift from marginal toward attached workers. These mechanisms reorganize the drivers of the cycle and sharpen common questions: recessions feature near zero changes in TFP and welfare costs 59% lower than the standard model.

JEL Classification: J60; J20; E32;

https://doi.org/10.21034/iwp.130

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Opportunity and Inclusive Growth Institute Working Papers

Publication Date: 2026-07-01

Number: 130