Playing Hard to Get: Theory and Evidence on Layoffs, Recalls and Unemployment

Abstract

Given the importance of recall to previous employer in the United States, I provide both theoretical and empirical analyses of an asymmetric information model with an endogenous layoff-rehire process. I show that taking into account the possibility of recalls has important implications for the study of post-displacement earnings and unemployment duration of laid-off workers in the U.S. I find that high-productivity laid-off workers may choose unemployment over a low-paid job, even though they may not be recalled. Thus, through unemployment they signal to prospective employers their higher productivity. The model predicts that in the separating equilibria, unemployment duration for permanently displaced laid-off workers is positively related to post-displacement wages. I confirm this result using data from the January 1988-1992 Displaced Workers Supplements and the Panel study of Income Dynamics (wave XIII to XXIV). I use workers displaced through plant closings as a means of controlling for unobserved heterogeneity not correlated with being a laid-off worker and with having a positive probability of recall. I find that laid-off workers with less than one month of initial unemployment spell have greater wage losses than similar workers displaced through plant closings, but that this wage differential disappears when workers are at least one month unemployed.

JEL Classification: J60, J30