1993 Reports

The Effects of Sectoral Decline on the Employment Relationship

Idson, Todd; Valletta, Robert

This paper investigates tenure effects on employee retention under varying labor market condition. We develop simple models of the likelihood of employer default (through early dismissals) on delayed payment and specific human capital contracts, and the predicted tenure pattern in these defaults under adverse conditions. The empirical implications of the models are investigated using competing risks analyses of tenure effects on recall and new job acceptance applied to layoff unemployment spell data from Waves XV and XVI (1982-83) of the Panel Study of Income Dynamics. The results indicate that adverse conditions (sectoral employment decline and unemployment) significantly reduce the positive tenure effect on recall probabilities in the 1983 data. This result is consistent with firm default on delayed payment contracts, but may also reflect the effect of technological changes that lower the value of firm-specific investments.