Impact of Layoff Notices on Household Debt and Reemployment

Anna M. Costello, Professor of Accounting and David G. Booth Faculty Fellow
Christopher R. Stewart, Assistant Professor of Accounting and William S. Fishman Faculty Fellow

Are workers with credit constraints better off when they are warned of a layoff? Over one million US workers are involuntarily displaced from their jobs each year. To assist these workers, US lawmakers enacted the WARN Act, which requires employers to provide employees at least 60 days of layoff notice. Advance notice allows workers to seek alternative employment or to enter skill training programs. But such notice also gives workers time to borrow in preparation for unemployment, which could be vital for credit-constrained workers who, without forewarning of a layoff, might be excluded from access to credit at the time of a redundancy event. Thus, layoff notices could benefit disadvantaged households, by allowing them to supplement temporary decreases in earnings through a credit channel. Alternatively, by giving workers time to borrow, layoff notices could unintendedly exacerbate debt problems for disadvantaged households, which has important consequences for households, lenders, and the overall labor market. Using employee-level data on borrowing, spending, saving, and credit we examine our question in the context of "mass" layoff events in the US from 2000 to 2019.