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posted on 10 September 2016

All Layoffs Are Not Created Equal

from the Philadelphia Fed

-- this post authored by Shigeru Fujita

U.S. firms use temporary versus permanent layoffs more often than it might appear - a finding that may suggest a different focus for labor market policy.

Finding any new job takes time and resources. Finding the right job is especially difficult. For workers and employers alike, it is costly to determine whether they will strike a good match regarding pay, location, schedule, skills, work environment, and so on. These costs hamper not only individual workers and businesses but also the wider economy.

The greater the amount of search friction, the greater the extent of mismatch across the job market and the less efficiently labor is used throughout the economy, raising unemployment and lowering labor productivity.

An exception to this problem occurs when a worker is rehired by the same firm for which he or she worked before. For example, when a manufacturing plant is closed for retooling, as automakers typically do for a couple weeks in July, workers are let go temporarily and are rehired when the retooling is completed. In such cases, workers and firms know in advance what to expect from each other, and thus the usual problem of mismatch, which represents the difficulty of forming a new employment relationship, becomes moot. The prevailing view is that temporary layoffs are largely a thing of the past and that their use is limited to a small number of industries such as durable goods manufacturing and construction. Research has indeed suggested that their use has diminished along with manufacturing jobs since the mid-1980s.

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