Signaling Effects of Layoffs in South Korea

Abstract

I examine an asymmetric-information model of layoffs (Gibbons and Katz, 1991) by comparing changes in earnings of laid-off workers and displaced workers by plant closings using Korean data. The estimation result shows that laid-off male workers experience 11.5% greater earnings losses than those displaced by plant closings. Laid-off workers also have longer unemployment spells. Contrary to previous studies, the signaling effect of layoffs is observed not only in white-collar but also blue-collar occupations in South Korea. The seniority-based wage payment system and low unionization rate in South Korea are suggested as possible reasons for this unique finding.