published as 'A signaling model of temporary layoffs' in: Oxford Economic Papers, 2009, 61 (3), 566-585
Temporary layoffs are an important feature of the United States labor market. If these
employer-employee relationships exist because of valuable job-matches, unemployment
among high-productivity laid-off workers may be optimal from societal perspective. However,
because of asymmetric information, low-productivity workers may behave strategically, and
choose unemployment instead of low-wage jobs, resulting in an inefficient level of
unemployment. This paper shows that in such cases, a re-employment bonus may give the
correct incentives to laid-off workers and achieve the optimal equilibrium. The paper analyzes
the equity properties of such a policy and its cost effectiveness. Finally, the model fits the
data and offers several policy implications.
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