Political Uncertainty and the Timing of Mass Layoffs

This study examines the relation between political uncertainty arising from state-level election cycles and the timing of employee dismissal and plant closure notices filed by US firms under the Worker Adjustment and Retraining Notification (WARN) Act of 1988 (hereafter, WARN notices). We appeal to a real options framework to predict that firms delay layoff decisions and the issuance of WARN notices until the resolution of political uncertainty. Using establishment-level data on layoffs disclosed in WARN notices and state elections occurring between 1994 and 2022, we document that the likelihood of issuing WARN notices declines during the election quarter but increases in the subsequent quarter. Cross-sectional findings show that political uncertainty plays a significant role in the timing of WARN notices during election periods while other factors, including partisanship, economic conditions, union strength, and firm visibility, may also play a role. Further, firms that delay WARN notices do not experience a significant deterioration in their medium-term financial performance. Overall, our findings provide evidence that firms delay labor adjustment decisions and the announcements of such decisions in response to political uncertainty.