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The Importance of Temporary Layoffs: an Empirical Analysis

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MARTIN S. FELDSTEIN HarvardUniversity The Importance of Temporary Layoffs. An Empirical Analysis EVERY GOOD theoretical or econometricstudy must be based on a rea- sonably accurateempirical foundation. If the basic magnitudesof the sub- ject are misperceived,the theoreticalmodel or econometricspecification will lead the researchastray. In recentyears, researchon the centralmacroeconomic questions of un- employmentand wage inflationhas been advancedby the empiricalstudies of Hall, Holt, Parnes, Perry, Wachter, and others. Meanwhile,the U.S. Bureau of Labor Statisticshas benefitedthe profession by expandingthe data base with detailed monthly summariesof household and establish- ment data and through the provision of complete data from the Current Population Survey. All of this microeconomicevidence has greatly enrichedunderstanding of the natureof unemployment.The traditionalview, based on the experi- ence of the depression,pictured the unemployedas an inactivepool of job losers who had to wait for a generalbusiness upturn before they could find new jobs. Modern researchhas shown that this picture is distorted.The majority of the unemployed do not become unemployedby losing their previousjobs; they quit voluntarilyor are new entrantsor reentrantsinto Note: I am gratefulto the National Science Foundation for financialsupport, to Alan Auerbachand Pamela Hannigan for researchassistance, to Thomas F. Bradshawof the Bureau of Labor Statistics for providing unpublished tabulations, and to Richard B. Freemanand membersof the Harvardseminar in labor economics for useful discussions. 725 726 BrookingsPapers on EconomicActivity, 3:1975 the labor force. Moreover, the typical duration of unemploymentis very short; more than half of unemploymentspells end in four weeks or less. However,one very importantaspect of unemploymenthas been largely ignored:temporary layoffs. In my 1972study for the Joint EconomicCom- mittee,I noted that during 1971manufacturing firms rehired about 85 per- cent of the same workersthat they had laid off.' This remarkablestatistic whettedmy appetite for more informationabout temporarylayoffs-that is, unemploymentwithout job change. Since then I have examineda num- ber of sourcesof unpublisheddata on the phenomenonand I am now con- vinced that it is of great importanceand requiresa major reevaluationof currenttheories of unemployment. Despite their obvious importance, no data on temporarylayoffs are currentlypublished. My purposein this paper is to presenta range of new empiricalinformation on temporarylayoffs that can provide a foundation for futureanalytic and econometricresearch. The evidenceis based on the analysis of unpublisheddata from the U.S. ManpowerAdministration's National LongitudinalSurvey of work experienceof older men, from the CurrentPopulation Survey of March 1974,and from specialmonthly tabu- lations of job seeking since 1970 made by the Bureau of Labor Statistics. The paper goes on to analyze the manufacturingturnover data that first arousedmy interest in temporarylayoffs. Finally, I will comment briefly on some of the implicationsof temporarylayoffs for the theory of unem- ployment,wage rigidity,the Phillipscurve, and unemploymentinsurance.2 Definitionsof Unemployment Becausethe officialterminology of unemploymentstatistics is unfamiliar, some definitionsare in order. Estimatesof unemploymentare based on a nationalhousehold survey, the CurrentPopulation Survey. If an individual reportsthat he is not workingbut that he has looked for work in specified 1. Martin S. Feldstein, Loweringthe PermanentRate of Unemployment,A Study Pre- pared for the Use of the Joint Economic Committee, 93 Cong. 1 sess. (1973), p. 12. 2. For a first step toward an explicit theory of temporarylayoffs, see my "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy (forthcoming, June 1976). That paper deals with some but not all of the issues raised in the concluding section below. Martin S. Feldstein 727 ways withinthe past four weeks,he is classifiedas unemployed.3The means of looking for work includechecking newspaper ads and talkingto friends as well as seeing employersor employmentagencies. However,looking for work is not the only criterionof unemployment. An individualwho has a new job that he is planningto start within thirty days is classifiedas unemployedeven if he has not looked for work within the past four weeks. Far more important,those who are on layoff from a job are countedas unemployed.Any individualwho reportsthat he did not work at all during the week before the survey is asked, "Did you have a job (or business)from which you were temporarilyabsent or on layoff last week?"Those who answer "yes" are then asked, "Why were you absent from work last week?"Answers involving illness, weatherconditions, and vacation are not consideredunemployment. But an individualis regarded as unemployedif he reportsthat he is on layoff from his regularjob and expectsto be recalled.Thus, an individualcan be unemployedeven though he responds that he has a job. Moreover, these individualsare not even asked about theirjob-seeking activity in the past four weeks. Individualswith a job but on layoff are classifiedinto two groups.Some- one with a definitedate of expectedrecall within thirty days is classifiedas on "temporarylayoff" while all others are classifiedas on "indefinitelay- off." Since all layoffs are expected to be temporaryin some sense, I will referto the first group as "fixed-durationlayoffs" and the second group as "indefinite-durationlayoffs." The term "layoff"is also used by the Bureauof Labor Statisticssome- what differentlyin describingmanufacturing turnover on the basis of data reportedby establishmentsrather than households.In that context, layoffs are defined as "suspensionswithout pay lasting or expected to last more than 7 consecutivecalendar days, initiatedby the employerwithout preju- dice to the worker."4This definitionof layoffs includespermanent separa- tions as well as temporarylayoffs, but excludesdischarges "for cause" and compulsoryretirements as well as separationsinitiated by the workers. Personsdesignated as unemployedin the CurrentPopulation Survey are 3. A single adult in the household describes the employment and unemployment experienceof everyonein the household. It would thereforebe more accurate to say, "If it is reported that an individual is not working but.... " I will not bother to make this distinction in the remainderof the text. 4. Employmentand Earnings,vol. 22 (November 1975), p. 135. 728 BrookingsPapers on EconomicActivity, 3:1975 classifiedaccording to four "reasons"for unemployment:job losers, job leavers,new entrants,and reentrants.The definitionsare complex and not alwaysintuitively obvious. Job losers includeindividuals on layoff-of both fixed and indefiniteduration-even though they state that they have a job from whichthey considerthemselves to be absentwithout pay. Individuals who alreadyhave a new job at which they will begin work within thirty days are also classifiedas job losers if they lost their previousjob rather than quitting or being new entrantsor reentrants.Finally, a job loser can be anyone who actuallylost his previousjob without expectationof recall and has, in principle,been looking for work since then. In practice,looking withinthe past four weeksis the onlyjob-seeking test for someonewho says that he startedlooking when he lost his previousjob. A job leaver is one who quit his previousjob and has been looking for work since then. A new entrant is one who never worked before at a full- time job lasting at least two weeks. Reentrants are essentiallya residual category,including individuals who quit or lost theirprevious jobs but who have been out of the labor force before startingthe currentperiod of job seeking. Unemploymentwithout Job Change:The NationalLongitudinal Surveyof OlderMen One of the four National LongitudinalSurveys that were conductedfor the Departmentof Labor providesinformation on unemploymentand job changesduring the five years from 1966to 1971 among men aged 45 to 59 in 1966.5Because these data cover the same group of men over five years, they permit study of the frequencyof unemploymentwithout job change (that is, change of employer)and of job change without unemployment. The importanceof temporarylayoffs duringthe first year of the survey is shown by the firstcolumn of table 1. During the year, 9.4 percentof men 5. The survey was directed by Herbert Parnes and conducted by the Bureau of the Census; for a description, see U.S. Department of Labor, Manpower Administration, ThePre-Retiremenit Years: A LonigitudinalStudy of the LaborMarket Experienceof Men, Manpower Research Monograph 15, vol. 2 (1970). The four surveys covered only selected subgroups of the population: men aged 45-59, women aged 30-44, and young persons aged 14-24 of both sexes. MartinS. Feldstein 729 in this age groupexperienced some unemployment.6Even amongmen with no job change during the year, 4.2 percent experiencedunemployment. Indeed, this group accountedfor 40.5 percent of all weeks of unemploy- ment and 49.5 percentof all unemployedpersons. One reasonwhy so much of the unemploymentoccurs among those who do not changejobs is that nearlytwo-thirds (65.8 percent)of those who do changejobs do so without experiencingany unemployment.Finally, the mean number of weeks of unemploymentis much shorterfor those who experiencetemporary layoffs (8.2 weeks) than for those who are unemployedwhile changingjobs (11.8 weeks). The data for the entire five-yearperiod
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