(joint with Hans-Martin von Gaudecker, Bonn)



We study the structure of workforce adjustments when firms facing adverse demand conditions are offered public financial incentives for downsizing, specifically focusing herein on public early retirement schemes. A simple labor demand framework with stochastic product demand and firing costs heterogenous in the workers' eligibility for early retirement predicts that distressed firms will fire with predilection those workers eligible to retire early. We test this implication on the entire set of worker flows resulting from mass layoff events in Danish private firms over the two decades 1980-2001, making use of the several reforms in the early pension system over that period. We find the implication verified for the lower-skilled, but not for the higher-skilled, workers. An extension of our homogenous, firm-level, model with within-firm employee skill categories experiencing asymmetrically any permanent shocks to the firm's demand can rationalize this finding.