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Federal Reserve Bank of St. Louis
Working Papers
Seniority-based layoffs as an incentive device
Joseph A. Ritter
Lowell J. Taylor
Abstract

This paper provides a simple economic rationale for two elements that often appear - implicitly or explicitly - in firms' personnel policies. When firms reduce their labor input they often (i) lay off a few individuals rather than adjust work hours, and (ii) make retention decisions on the basis of seniority. We show that in a stochastic environment, a seniority-based layoff policy can have the effect of making the job valuable to a worker over most of her career. This provides work-life incentives using a mechanism similar to Lazear's well known model of upward-sloping wage profiles. Firms reduce their workforce by adjusting employment rather than work hours because layoffs are an integral part the incentive scheme.


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Joseph A. Ritter & Lowell J. Taylor, Seniority-based layoffs as an incentive device, Federal Reserve Bank of St. Louis, Working Papers 1998-006, 1998.
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Keywords: Labor market
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