This paper provides a simple economic rationale for two elements that often appear-implicitly or explicitly-in firms' personnel policies. When firms reduce their labor input they often ( i ) lay off a few individuals rather than adjust work hours, and ( ii ) make retention decisions on the basis of seniority. We show that in a stochastic environment, a seniority-based layoff policy can have the effect of making the job valuable to a worker over most of her career. This provides work-life incentives using a mechanism similar to Lazear's well known model of upward-sloping wage profiles. Firms reduce their workforce by adjusting employment rather than work hours because layoffs are an intregal part the incentive scheme.
https://doi.org/10.20955/wp.1998.006
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