Title

Optimal implicit contracts and the choice between layoffs and work sharing

Document Type

Working Paper

Journal/Book Title/Conference

European Journal of Political Economy

Volume

8

Article

1097

Issue

2

Pages

251-267

Publication Date

10-1989

Department or Program

Economics Department

Abstract

Implicit contract models of labor market equilibrium under work sharing and layoffs are constructed to examine several common explanations for the observed market bias in favor of layoffs. We first establish the optimality of work sharing in the absence of complicating factors. We then show that, contrary to the conventional view, fringe benefits can actually encourage work sharing, and that different hours and employment elasticities of output need not discourage it. Our findings confirm the view that tax distortions in the unemployment insurance system contribute to the bias toward layoffs. However, we show that unemployment benefits for those working reduced hours can help eliminate this bias.