When Should Employees Be Suspended Instead of Fired?

Abstract: The economic theory of incentives explains why a worker who consistently underperforms must be fired. To respond to incentives, the worker must maintain a stake in the relationship with the employer. When the worker's stake runs out, the relationship must terminate. This article reviews recent research showing that this explanation is oversimplified. A temporary suspension of the worker is usually sufficient to rebuild the worker's stake, which allows the productive relationship to resume without terminating. The costs and benefits of suspending the worker, however, can be highly sensitive to the worker's and the employer's outside options. For this reason, similar jobs can have vastly different average job durations.

Keywords: theory of incentives; job performance; suspension; moral hazard; information friction;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2022-11

Volume: 22

Issue: 45