Temporary Layoffs in the Theory of Unemployment

TLDR

Most laid‑off workers are quickly rehired by their original employer, a fact that challenges existing unemployment theories. The paper proposes a theory of temporary layoffs, focusing on why employment is cut rather than hours. The analysis examines how unemployment insurance and taxation influence temporary layoffs.

Abstract

The typical worker who is laid off is soon rehired by his original employer. This important and generally unnoticed fact requires a major reevaluation of our current theories of unemployment. This paper develops a theory of temporary layoffs. Specific attention is given to the question of why employment is reduced instead of hours. The role of unemployment insurance and of taxes is examined in detail.