Who Do Firms Lay Off and Why?



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    •  The author’s affiliation is the School of Labor and Employment Relations, University of Illinois at Urbana-Champaign, 504 East Armory Avenue, Champaign, IL 61801 and the ESADE Business School, Ramon Llull University, Avenida Pedralbes 60-62, E-08034, Barcelona, Spain. E-mail: dencker@illinois.edu; (217) 333 2383. I gratefully acknowledge valuable comments from Ruth Aguilera, Joe Broschak, Peter Cappelli, Kevin Hallock, Herminia Ibarra, Peter Marsden, Joe Martocchio, and Aage Sørensen. Thanks also to the editor, Trond Petersen, and the anonymous reviewers for their helpful comments and suggestions. The usual caveats apply.


I develop and test a structural–historical account of corporate reductions in force (RIF) to assess whether this widespread process was redistributive or efficient. I argue that changes in the context of restructuring in recent decades, coupled with substantial changes in organizational compensation systems, lead to temporal variation in the likelihood of “broken-contract” RIF, in which firms terminate highly paid managers, and “trimming the fat” RIF, in which firms terminate low-performing managers. Analyses of personnel records from a Fortune 500 manufacturing firm indicate that low performance leads to increased risk of separation in each of the two RIF undertaken by the firm, with the effect becoming stronger over time in part because of changes in the firm’s performance management system. By contrast, high wages were a more important factor explaining departure during the firm’s RIF in the 1980s—when competitive pressures to default on bonded contracts were strong—than during its RIF in the 1990s.