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Mandatory notice and layoff, job search, and efficiency

Author

Listed:
  • Cederlöf, Jonas

    (IFAU - Institute for Evaluation of Labour Market and Education Policy)

  • Fredriksson, Peter

    (Uppsala Univeristy)

  • Nekoei, Arash

    (Stockholm University)

  • Seim, David

    (Stockholm University)

Abstract

In all OECD countries, Mandatory Notice (MN) policies require firms to inform workers in advance of a layoff. In our theoretical framework, MN helps workers avoid unemployment and find better jobs by encouraging workers to search for a new job while still employed, thereby increasing future production. The magnitude of this production gain depends on the relative effectiveness of search while employed versus unemployed. But on-the-job search and diminished work incentives reduce current production. If future gains outweigh current production losses, longer advance notice improves production efficiency. If not, Coasian bargaining predicts that firms offer a larger severance instead of longer notice. With bargaining, the sole efficiency loss of MN is due to delayed separations of unproductive job matches. We test these predictions using novel Swedish administrative data on layoff notifications. Workers eligible for extended MN receive longer notice and larger severance, resulting in less exposure to non-employment spells and higher-paying jobs. These favorable labor market outcomes are solely due to longer notice; in contrast, larger severance delays job finding and has no impact on wages. We also show that advance notice replaces job search while unemployed with more effective search while employed. On the production side, we document a productivity drop among notified workers and estimate a production loss due to delayed separations. Using our estimates of production gains and losses to evaluate the overall production efficiency, we conclude that the gains of MN seem to outweigh the losses.

Suggested Citation

  • Cederlöf, Jonas & Fredriksson, Peter & Nekoei, Arash & Seim, David, 2024. "Mandatory notice and layoff, job search, and efficiency," Working Paper Series 2024:16, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  • Handle: RePEc:hhs:ifauwp:2024_016
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    References listed on IDEAS

    as
    1. Stefan Eriksson & Dan-Olof Rooth, 2014. "Do Employers Use Unemployment as a Sorting Criterion When Hiring? Evidence from a Field Experiment," American Economic Review, American Economic Association, vol. 104(3), pages 1014-1039, March.
    2. Cederlöf, Jonas, 2024. "Reconsidering the cost of job loss: Evidence from redundancies and mass layoffs," Working Paper Series 2024:2, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    3. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
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    More about this item

    Keywords

    Advance notice; Job search; Layoff; Job quality;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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