Lay-offs or pay cuts?

Tucker Case said:

this is the assumption that makes no sense. The number you provide doesn't exist in reality. Your expected loss is either 0 or $641 per week. It's not 10% of the layoff total.

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Expected value is calculated by taking the weighted average of all the possibilities. (90%)($1000) + (10%)($359) = $936. A loss of $64 per week on average. Of course I'll never lose exactly $64, but knowing your expected value is absolutely necessary to assessing the risk/reward tradeoff.

Tucker Case said:

The part I've put in bold is just silly. It makes no sense whatsoever. When you put the "until I find another job" in there, it is always in cases where you HAVE received the layoff. Then your guaranteed losses are $641 per week.

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It doesn't matter. It works the same way even if I'm in the 90% who don't get laid off. There's a 10% chance that I'll collect $359 for a few weeks, and there's a 90% chance that I'll collect $1000 over that same time period. At the end of that time period, the two scenarios will be the same (or nearly the same) and so this time period is the only one we need to worry about.

I understand that there's more risk involved with chancing the layoff, as my loss COULD be $641 per week. That's why, as I said, some people might prefer to be conservative and take the low risk / low reward option of the pay cut instead. But risking the layoff is better EV.

Tucker Case said:

It could be up to $1000 per week while you are trying to get unemployment. If you do get the job quickly, you might not get the unemployment. If it takes two weeks to find another job, your guaranteed losses are $2000.

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Admittedly I'm not entirely clear on how unemployment laws work. So I'd be earning $0 for the first two weeks and $359 thereafter? OK. Let's stick with the assumption that it takes me four weeks to find a job.

10% of the time I'll be earning $180 per week (on average) over that four-week span, and 90% of the time I'll be earning $1000 per week over that four-week span. In that case, my expected loss is $82 per week. Worse than before, but still better EV than the pay cut.

Tucker Case said:

When you say you can find a job more quickly if you are laid off, that's not necessarily true. You are making a gamble that you'll find a job quickly in the first place.

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Well presumably the same pool of jobs would be available to me whether I take a pay cut or get laid off. The only variable is the amount of time I'm able to spend searching for one of them, and my level of motivation. Presumably these variables would be higher if I was laid off as opposed to the pay cut.

Tucker Case said:

As you've pointed out, if the situation means a systemic decline in the industry, that is an asinine assumption to make. The other firms may also be laying people off and there will be a glut of people applying for the same jobs as you are.

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But that is true of the pay cut situation as well.

Tucker Case said:

It's a terrible assumption to make because you are basing your risk assesment on the BEST case scenario instead of the WORST case scenario in an economy where the worst case scenario is the more likely one.

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No, I'm basing my assessment on the AVERAGE case scenario, which is why I did expected value calculations. You seem to be assuming that a 10% risk of being laid off is the same as a 100% guarantee of being laid off. It is not.

Tucker Case said:

But as you've also said:

"It depends how long I'm laid off, how long my salary is reduced, etc."

I worked out the numbers earlier. If you are only off for two weeks, and thus don't end up getting unemployment, you lose $2000. That's just two weeks. And you won't know how much you are making and have no control over it.

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OK, so if we assume I'll find a job after two weeks: I earn $0 per week 10% of the time, and $1000 per week 90% of the time. My expected value is $900 per week over that time span, which is the same as the pay cut. So even here, the EV of the layoff is no *worse* than the pay cut, although the risk is higher.

Tucker Case said:

Which means that comparatively, taking the layoff gives you 20 weeks to find a specific job that pays more than you make at the reduced pay, preferably back at your original level

20 weeks. About 5 months. And that breaks you even from a two week layoff, but gives you a better final result (a job that pays the old wage).

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What's the 20 weeks? Is that how long unemployment benefits pay out? I think it's safe to assume that that wouldn't be a factor...at least for me.

Tucker Case said:

You maintain control over what job you eventually accept, guaranteeing that the only type of job you will accept pays more than what you will be making at reduced income and preferably as much or more than what you made before the cut.

And you'll have 18 more weeks to take care of it.

Since you are operating under the assumption that you'd find work quickly in the worst case scenario, you should be able to find a better paying gig in five months. You are in such high demand that you are willing to put it all on the line based on how quickly you'll be able to find a job while unemployed. If you can't find a better paying gig in 5 months of looking, then that assumption must be pure mythology, which makes risking the layoff an even greater risk.

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Right, I am making that assumption. I figure 4 weeks is a reasonable, relatively conservative guess for how long it would take me to find employment if I was laid off. It would probably be less than that. Maybe 8 weeks in the worst case scenario. But regardless of the length of time it takes (which would depend on market factors), I think it's also reasonable to assume that it would take me twice as long to find a new job if I took the pay cut than if I was laid off.

The expected value of the layoff is better than the expected value of the pay cut (except in your worst-case assumption where the two are the same), but the risk is higher. So it just comes down to whether or not you're willing to accept higher risk for a higher reward. As a single 20-something with enough money saved up, I am willing to do so. Maybe other people aren't. (It's the same reason I primarily invest in stocks instead of bonds/CDs).

I just saw this thread. I would say pay cuts would be better, and I would go so far as to say that those paycuts should be progressive - that is, those who earn a higher salary should take more of a paycut than those who earn a smaller amount. However, I would try to make up for that by giving those who earn a larger amount some kind of stock options so they are better invested in the productivity of the company.

Kandahar said:

Well presumably the same pool of jobs would be available to me whether I take a pay cut or get laid off. The only variable is the amount of time I'm able to spend searching for one of them, and my level of motivation. Presumably these variables would be higher if I was laid off as opposed to the pay cut.

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Another variable you are excluding is the depletion of your savings and teh unknowns of finding a job in a situation where the income has disappeared. You are gambling on a gamble that you can get a job quickly.

But that is true of the pay cut situation as well.

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Yes, but there's 0 risk in the pay cut situation.

No, I'm basing my assessment on the AVERAGE case scenario, which is why I did expected value calculations. You seem to be assuming that a 10% risk of being laid off is the same as a 100% guarantee of being laid off. It is not.

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No, I'm looking at the gamble from the perspective of a good gambler.

when I calculate the risk side of the equation, I don't artificially lower that by factoring in the reward side. They are kept separate.

The reward side of the equation is the 90% of the time you save that 10% of your pay. Done. Nothing else to do here.

The risk side of the equation is the 10% of the time you lose it all chasing that low reward.

You are ****ing up the risk side of your equation by taking the average. You aren't risking the average, you are risking it all. It only happens ten percent of the time, but the reason you keep the risk and reward sides separate is so that you can have a good idea of what it being risked and what the legitimate expected reward is.

The reward in this case is minimal when compared to the risk.

OK, so if we assume I'll find a job after two weeks: I earn $0 per week 10% of the time, and $1000 per week 90% of the time. My expected value is $900 per week over that time span, which is the same as the pay cut. So even here, the EV of the layoff is no *worse* than the pay cut, although the risk is higher.

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You wouldn't be looking for a job in the 90% situation. That's the time you win. What do you win? Not having to look for a job. That's the reward side of the equation, and doesn't factor into the risk side of the equation.

What's the 20 weeks? Is that how long unemployment benefits pay out? I think it's safe to assume that that wouldn't be a factor...at least for me.

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No, the 20 weeks is the amount of time in a pay cut scenario that equals your first two weeks of losses in the lay off situation.

If you do end up in the unlucky 10%, you will lose $2000 in two weeks. That's assuming an absurdly lucky job search period of only two weeks.

If you take the pay cut, it will take 20 weeks before you lose $2,000.

Right, I am making that assumption. I figure 4 weeks is a reasonable, relatively conservative guess for how long it would take me to find employment if I was laid off. It would probably be less than that. Maybe 8 weeks in the worst case scenario. But regardless of the length of time it takes (which would depend on market factors), I think it's also reasonable to assume that it would take me twice as long to find a new job if I took the pay cut than if I was laid off.

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OK, then using your "conservative" estimates.

Let's say it take 4 weeks to find a job with the layoff and 8 weeks to do it with the pay cut.

Let's also say you get the unemployment, and only lose $641 dollars a week in the layoff scenario.

This means that if you do get laid off, you will lose $2,564 over those 4 weeks.

Let's say you take the pay cut. In 8 weeks you will lose $800. Reward in this situation = $7,200 salary over those 8 weeks, no risk of losing everything

If you win the gamble, you don't lose that $800. Reward in this situation is $8,000 over those 8 weeks, but has a risk of losing everything.

Personally, I totally disagree with your assessment that it would take only 4 weeks to find a job. I actually think it's an absurd expectation. The national average right now is 4-7 months. http://economy.freedomblogging.com/files/2009/01/challenger-job-survey.pdf

But even using your absurdly optimistic (unrealistic?) estimate that you'd find a job in 4 weeks, you would be putting a minimum of $2564-$4000 on the line for the chance to not lose $800.

If you take the 4-7 month average, you are looking at about 16-28 weeks on unemployment.

In we use the national average as our guide, the amount you can lose in the layoff while getting unemployment is $10,256-$17,948.

If you take the layoff, you will lose between $1600-$2,800 over the same time span, but you will be making between $14,400-$25,200 over that time. Assuming it takes twice as long to get a new job this way, you will lose $3,200-$5,600 over that time.

If your gamble pans out, and you don't lose your job, you will make between $16,000 and $28,000 over that time.

Now, what needs to be factored in using the national averages is how well your bankroll can take about a $14,000-$18,000 hit over the next 4-7 months.

Is it worth that kind of risk for the relatively minimal gains (actually it's not really gains because it is merely a lack of losses) of $1,600-$2,800 over that same span?

Another mitigating factor is that you can make up that $100 a week fairly easily. I personally make more than that for 5 or 6 hours of work on Saturday nights as a doorman at a bar.

The expected value of the layoff is better than the expected value of the pay cut (except in your worst-case assumption where the two are the same), but the risk is higher. So it just comes down to whether or not you're willing to accept higher risk for a higher reward. As a single 20-something with enough money saved up, I am willing to do so. Maybe other people aren't. (It's the same reason I primarily invest in stocks instead of bonds/CDs).

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Except it's not actually a higher reward. It's a lack of loss, and a relatively small one at that.

And the quantities being risked are much greater than the reward being offered.

An this is not really comparable to investing, because you don't go all-in on investments. It's gambling, pure and simple. You are betting your entire guaranteed income on an outcome that offers little to no reward.

I'm not someone who takes the safe route. The money I make from the bar is parlayed into my poker fund which yields me pretty high returns on a very high risk investment.

It's making smart bets that keeps me profitable in poker. I only take the high-risk bets when there is an equally high reward. I don't chase. I accept losses when it makes more sense to accept them.

The situation being described here does not fit into that category. Primarily because there isn't an e2qually high reward comparable to the risk involved.

Even though statistically it is a break even scenario, it's not a bet worth chasing because it offers little profit. The gamble is not worth the meager reward.

Interestingly enough, the reverse scenario is a good example of a smart high risk bet.

Risking $100 on a 10% chance to win $900 is a smart bet. Sure, you will lose 90% of the time, making it very high risk, but over the long haul, making the same bet over and over again, you'll break even.

When it does hit, however, you have a very high reward proportional to the risk involved.

It's not just a matter of odds of winning. It's also a matter of what is being put on the line and what one can expect to win in the best case scenario. Not to mention pot odds (i.e. if the bet is repeated over and over, will it lose, win or break even?).

If the best I can expect from a bet is that I won't lose 10% of my stack, I'm not going to do something stupid like putting all of my money on the line to protect that 10%.

The scenario described works out mathematically almost exactly like a two-handed game of Hold 'em with a board full of clubs that look like the following: A,K,Q,J,8 (again, all clubs)

I have two non-clubs in my hand, making it so the best I can expect out of the hand is a split-pot. Statistically speaking, I have about a 91.2% chance that it will be a split pot. (i.e. there is an 8.8% chance that my opponent has the 9 or 10 of clubs)

There are 200 chips in the pot, and I put 100 of them in there. I have 900 left in my stack. My opponent raises me all-in.

I know that I have about a 90% shot of splitting that pot and getting my 100 back. But I have to risk everything I have for that 100.

If he actually has the 9 or 10, I lose it all.

Sure he might be bluffing, but I have no chance of winning the pot. Only getting my 100 back. It's not worth risking everything for such a ****ty return. It's absolutely stupid to chase that 100. Every time. If I had a chance of winning the whole pot including his bets, then it becomes a different story.

If we replace the 8 on the board with a 2 of clubs, and I have the 8 of clubs in my hand, then I've got a 90% chance of winning the pot and I still have about a 10% chance of losing. Then the 10% chance of losing is mitigated by the actual chance for a reward.

You don't gamble it all on the chance for a split pot. That's stupid.

Goobieman said:

Not necessarily. You can still have the same number of hours.

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Most firms produce something. If there isn't enough demand, then they have to decrease the total amount of hours. It actually cost money to keep open and produce unwanted products.

For the society I think the better option is to lay off people, because some industries don't have a future and the demand will not increase after the crisis. It would have been much better if some lost their jobs and can move to another industry. If not, then some people will find that their pay won't increase after the crisis, neither their hours and it would have been much better for them and the society if they worked somewhere else.

However, if we get mass unemployment and in industried that do have a future, then I could see the point of doing that in some industries. However, in practical politics it would make the ones layed off mad, because their industries are not protected.

Goobieman said:

Let's say that you work in a department within a company. Your department has 100 employees, all of whom make about the same wage.

Management informs your department that it needs to cut your overall payroll by 10%, and offers you, collectively, the choice:

-10% pay reduction for everyone
-10% of your department will be laid off.

The chance of you being laid off is the same as everyone else's

Which do you choose?
Please explain your answer

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To the choice, I would pick 10% chance of beeing laid off. If I get laid off, then I can do something else, like taking a master degree in my profession at university or just do something else for a while. Money is not really a problem, because I save money. If I don't get laid off, then I can keep my wage and my job will be secure after the crisis.

Tucker Case said:

No, I'm looking at the gamble from the perspective of a good gambler.

when I calculate the risk side of the equation, I don't artificially lower that by factoring in the reward side. They are kept separate.

The reward side of the equation is the 90% of the time you save that 10% of your pay. Done. Nothing else to do here.

The risk side of the equation is the 10% of the time you lose it all chasing that low reward.

You are ****ing up the risk side of your equation by taking the average. You aren't risking the average, you are risking it all. It only happens ten percent of the time, but the reason you keep the risk and reward sides separate is so that you can have a good idea of what it being risked and what the legitimate expected reward is.

The reward in this case is minimal when compared to the risk.

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This is completely the wrong way to look at it. The AVERAGE reward (factoring in all the times you win and all the times you lose) has to be higher in order to get someone to take more risk, if we assume that most people are risk-averse.

That's why the stock market pays better than the bond market on average. There's more risk. The stock market pays about 9% annually on average, and the bond market pays about 5% annually on average. What you're asking me to do is to ignore all the years that I lost money when calculating my "reward" (i.e. my expected value).

"Risk" is not the same as "loss," and "reward" is not the same as "win." The reward is the expected value; the average that you'll win or lose. You incorporate both the good results and the bad results, weighing them according to their likelihood. The risk is not a measure of your maximum loss, it's a measure of how much variance there is. Then you can compare the risk and the reward to see if it's a tradeoff you're willing to make.

Tucker Case said:

You wouldn't be looking for a job in the 90% situation. That's the time you win. What do you win? Not having to look for a job. That's the reward side of the equation, and doesn't factor into the risk side of the equation.

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Incorrect. The AVERAGE expected value (i.e. reward) has to be higher to justify more risk.

Tucker Case said:

OK, then using your "conservative" estimates.

Let's say it take 4 weeks to find a job with the layoff and 8 weeks to do it with the pay cut.

Let's also say you get the unemployment, and only lose $641 dollars a week in the layoff scenario.

This means that if you do get laid off, you will lose $2,564 over those 4 weeks.

Let's say you take the pay cut. In 8 weeks you will lose $800. Reward in this situation = $7,200 salary over those 8 weeks, no risk of losing everything

If you win the gamble, you don't lose that $800. Reward in this situation is $8,000 over those 8 weeks, but has a risk of losing everything.

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That's why I said it comes down to how much risk you're willing to tolerate. Taking the gamble of getting laid off is clearly the superior choice from an EV standpoint, it just depends if you're willing to take on more risk for more reward. Stocks versus bonds.

Tucker Case said:

Personally, I totally disagree with your assessment that it would take only 4 weeks to find a job. I actually think it's an absurd expectation. The national average right now is 4-7 months. http://economy.freedomblogging.com/files/2009/01/challenger-job-survey.pdf

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Ya but I'm not the national average.

Tucker Case said:

But even using your absurdly optimistic (unrealistic?) estimate that you'd find a job in 4 weeks, you would be putting a minimum of $2564-$4000 on the line for the chance to not lose $800.

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...and since I only lose that money 10% of the time, that's a good bet.

Tucker Case said:

Except it's not actually a higher reward. It's a lack of loss, and a relatively small one at that.

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"Reward" does not necessarily imply positive economic gain. Losing less money (or not losing any money) can be a reward too.

Tucker Case said:

An this is not really comparable to investing, because you don't go all-in on investments. It's gambling, pure and simple. You are betting your entire guaranteed income on an outcome that offers little to no reward.

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Wrong. I am betting a certain amount of money (which I can estimate based on my salary, my potential unemployment benefits, and the estimated amount of time I'd be out of work), weighing the probabilities, and deciding whether the risk/reward trade off is worth it.

It's only "gambling" in the same sense that any financial decision is gambling.

Tucker Case said:

I'm not someone who takes the safe route. The money I make from the bar is parlayed into my poker fund which yields me pretty high returns on a very high risk investment.

It's making smart bets that keeps me profitable in poker. I only take the high-risk bets when there is an equally high reward. I don't chase. I accept losses when it makes more sense to accept them.

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Then you should understand the concept of expected value. That was probably the first thing I learned about poker.

The problem with the poker analogy is that the concept of risk doesn't exist in poker. You ALWAYS make the play that will earn you the most money over the long term (i.e. the play with the highest reward) regardless of the risk/variance in any individual hand. Good poker players never play scared. If you have a 2% chance of hitting your out and your pot odds are 1%, you pony up the cash even though you're going to lose it 98% of the time.

That isn't true in finance. We assume at least some degree of risk-aversion. Why? Because we aren't playing hundreds of thousands of hands where the bad beats and lucky breaks will even out over time; we're only playing a few hands over the course of our entire lives. In finance, the more risky the gambit, the higher my average reward needs to be. Conversely, the higher my average reward, the more risk I'm willing to tolerate.

Tucker Case said:

The situation being described here does not fit into that category. Primarily because there isn't an e2qually high reward comparable to the risk involved.

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The reward (expected value) is higher in the layoff scenario. The risk is also higher (since the variance is greater). Whether you're willing to tolerate more risk for more reward just depends on how risk-averse you are.

Tucker Case said:

Even though statistically it is a break even scenario, it's not a bet worth chasing because it offers little profit. The gamble is not worth the meager reward.

Interestingly enough, the reverse scenario is a good example of a smart high risk bet.

Risking $100 on a 10% chance to win $900 is a smart bet. Sure, you will lose 90% of the time, making it very high risk, but over the long haul, making the same bet over and over again, you'll break even.

When it does hit, however, you have a very high reward proportional to the risk involved.

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I think you are confused as to what "risk" is. Risk is a measure of uncertainty, not a measure of loss. For example, it's much more risky for me to jump out of an airplane with a parachute than for me to jump out of an airplane WITHOUT a parachute. In the latter case, I know with nearly 100% certainty what will happen. There is virtually no risk.

Goobieman said:

Let's say that you work in a department within a company. Your department has 100 employees, all of whom make about the same wage.

Management informs your department that it needs to cut your overall payroll by 10%, and offers you, collectively, the choice:

-10% pay reduction for everyone
-10% of your department will be laid off.

The chance of you being laid off is the same as everyone else's

Which do you choose?
Please explain your answer

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I would prefer an across the board 10% cut in pay for everyone. I would accomplish this by cutting hours for most, as that doesn't seem as intrusive for a lot of people than taking a 10% hit in lowering their wage (providing of course, they are hourly and not salary).

I am starting a new job in two weeks - due to heavy lay offs in the school district here. It's a bad situation and I am sorely disappointed that they didn't try other methods to try and cut the budget.

I notice (as many others) that no cuts started at the top - most of the deep cuts happened at Classified levels. Too bad; it takes a lot of people to make a school district run and 98% of the people who were laid off, worked at the school level. What's even more disheartening is that the Superintendent herself got a raise --- while others are losing their jobs. I would think it would make better sense to consolidate some positions at administrative level that would effect fewer people AND effect the student body the least.

Apparently, I expect too much.

I didn't wait around to see what their plans were for me.

Goobieman said:

Let's say that you work in a department within a company. Your department has 100 employees, all of whom make about the same wage.

Management informs your department that it needs to cut your overall payroll by 10%, and offers you, collectively, the choice:

-10% pay reduction for everyone
-10% of your department will be laid off.

The chance of you being laid off is the same as everyone else's

Which do you choose?
Please explain your answer

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as an employee who didn't receive a raise last year, i'm glad my company kept as many as possible, and happy i am one of those. of course i would take a pay cut to save jobs.

Kandahar said:

This is completely the wrong way to look at it. The AVERAGE reward (factoring in all the times you win and all the times you lose) has to be higher in order to get someone to take more risk, if we assume that most people are risk-averse.

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I had to edit my response down because it was too long. Let' s just stick with average expected losses and we'll look at the difference between average expected losses for both scenarios. That's the real expected gain between the scenarios. Then we'll look at hos easy it is to make up that difference with minimal effort.

First, I disagree that the reward is higher in the layoff scenario when you have marketable skills.

It's not about being risk-averse, it's about only taking on risk when the expected rewards actually warrant taking on the high risk.


In my calculations I've chosen $52K per year as my example for calculation purposes. If you take the paycut, your expected losses over a year's span is $5,200. It's not a pittance, but certainly not the end of the world when you were making $52K before. $100 per week.

If you take the layoff, your expected losses are $64.10 per week, or $3,330.20 per year.

The difference between $5,200 and $3,333.20 is $1,866.80. That's your expected reward in the layoff scenario.

That really is getting into the level of "pittance".

This is expected reward is the same for all salaries large enough to warrant the maximum unemployment benefits.

No matter how much the actual expected losses at 10% of a pay reduction, the only amount that decreases the expected losses in the layoff scenario is the amount of money that is gained by unemployment benefits.

So in any situation where maximum unemployment benefits can be received, the difference in expected losses between the layoff and the paycut scenarios will always be $1,866.80. Check for yourself.

At $2,000 per week, the expected loss with the paycut is $200 per week. The average expected loss for the layoff is $164.10 per week because you'd still only make 359 per week on unemployment. The average expected losses over a full year are: 10,400 for the paycut and $8,533.20 for the layoff. Difference: $1,866.80.

For such minimal expected gains, the risk is definitely not worth it.

Here's why:

I believe the current minimum wage in DC is something like $8.25 per hour. This means that taking on any second job and working just 5 hours a week will garner you a better expected loss than taking the layoff would.

Taking on a second job working just 5 hours per week at minimum wage in DC will net you $2145 in a year. When we deduct this from the $5,200 your expected losses from the paycut + second job working 5 hours per week scenario = $3055. I happen to have a second job that pays more than minimum wage and has similar hours per week as the described situation, so I know for a fact that they can be found fairly easily. It doesn't require much effort, and it's only drawback is that I am not free on most Saturday nights, although I'm always free to request a day off. That's the full extent of the inconvenience factor. Even using the lower Federal minimum wage, you still essentially break even at $7.25 per hour with only 5 hours a week.

I'm showing that number to give an idea of how absurdly easy it is to make up the difference between the scenarios at the given pay scale as well as to illuminate the extremely marginal nature of the gains in the layoff scenario when one doesn't even factor in the reward of being able to look for a better-paying primary job.

Again, due to the marginal nature of the expected value the only reason to accept the layoff risk is an aversion to job hunting and/or taking on a second job. That's the only thing that can be factored in that adds to the reward side of the layoff scenario enough to warrant taking on the risk, because the financial expectations are at best marginally better than the pay cut and at worst marginally worse than paycut + second job situations.

Essentially, the "higher reward" in the layoff scenario is virtually non-existent because while it is true that minimizing losses is a reward of it's own, it is also true that holding on to a guaranteed better position for capitalizing on better opportunities is a type of reward of it's own.

That factor coupled with the extremely marginal financial reward of risking the layoff makes the gamble not worth the risk.

It's easy to minimize the expected financial losses from the guaranteed better position that exists with taking a paycut.

In fact, not only is it easy to minimize the expected losses, it's actually fairly easy to make them better than the expected losses from the high risk position.

This is because the difference in expected losses is jack ****. Even in Wyoming or Georgia, the states with the lowest minimum wages at $5.15 per hour, one only needs to work an average of 7 hours a week at minimum wage in order to make up the difference in expected losses.

That's definitely not a high reward over time. Both scenarios lose over time. Neither of them offer gains.

Since the reward for taking the layoff is an attempt to minimize losses, and the difference in expected losses are minimal at best, one can easily argue that the reward of being in a guaranteed better position to capitalize on improved opportunities (i.e. holding out for a better paying job) is enough to outweigh the marginal benefits that can be attained by taking on an absurdly high risk (a potential loss of full salary minus $18,668, which is what you'd make if you received the maximum unemployment benefits over the course of a full year.)

The difference in expected losses per week is only $35.90. That's it. That difference can be made up very easily, with absolutely no risk whatsoever.

No matter how much you make, that's the maximum average expected benefit that can be achieved by risking the layoff.

The main point of contention I have with your analysis is that you are labeling the expected reward as "high", when it is at best marginal.

Since the bet is always a losing one over time, it's better to fold and stay content with the better guaranteed position.

This isn't about aversion to risk, it's about only taking on risk when the expected rewards are great enough to warrant taking on that risk.

That isn't the case in this scenario.

It's like "investing" in a stock you know will either lose all of your of money or not make any money at all versus "investing" in a bond that will definitely lose a very small amount money, but that small amount of money you do lose can easily be made up elsewhere.

The only reason stocks are worth the risk is because the returns are proportionally better as compared to the risk. You will, more often than not, gain over time. If the only options you had with stocks are losing money or not making money, there is no smart reason to accept the risk.

Yeah, I don't do the whole risk analysis bull**** because math makes my head hurt.

But, I would either take the lay off and find other work (because it's not hard at all for me to find work). While I look for work, I could draw unemployment because I was laid off.

Or, take the pay cut and look for other work.

Really the two are interchangeable.

rivrrat said:

Yeah, I don't do the whole risk analysis bull**** because math makes my head hurt.

But, I would either take the lay off and find other work (because it's not hard at all for me to find work). While I look for work, I could draw unemployment because I was laid off.

Or, take the pay cut and look for other work.

Really the two are interchangeable.

Click to expand...

Well..... To a point.

If we were to map out a persons total income from the time they worked, until the time they retired, and appropriated that based on the total consumption they will need until they die (and assuming you cannot find work instantly); taking a 10% cut in pay does not reduce your potential lifetime income (and your average yearly consumption which is a function of that said income) as much as getting laid off (long run). In the long run, the difference is incrementally marginal, as in it does not make a great difference. In the short run however, it makes quite a bit depending on time.

Say you begin working at age 20, and retire at age 65 with an initial salary (at age 20) of $25,000/year and living to age 80. For the sake of complexity, let us assume you are going to earn at least $25k/year for the next 45 years; you will have a life cycle income of $1,125,000. Given your estimated life span, you will be averaging a maximum consumption (assuming only income) of $18,750 per year on average. For added complexity, we can add say a 3% real annual expected increased in salary: [45/Σ/n=1] 25,000 + [((1-.97)x25,000)n+1] : and include a limit with period of time where your salary would decrease by 10% for two years, but doing so will only confuse and not have a significant effect on the theory.

A 10% cut in pay for two years results in a decrease of about $5,000 from your life cycle income to $1,120,000 resulting in a decreased maximum lifetime consumption average of $18,666.67 (or about $84/year).

The average time to find employment is about 19 weeks after you were first "released". This accounts to about $9,100 in lost income, or a decrease in your average life cycle income to the tune of : $18,598.33 or a decrease in $150/year. Does not seem so bad right? However, not everyone will live to 80.

In the short run however (as Tucker pointed out), the decline in potential standard of living is greater. Your max consumption average for two years (not considering financing) would be $20,450 as opposed to the $22,500 with taking the 10% cut. The shorter we draw this out, the greater impact it has on your standard of living. However, you only have a 10% risk of incurring such a reality so this really becomes a judgment call based on ones short term expectations. Keep in mind this does not include unemployment or taxation and is a simple illustration.

I am willing to assume that the lower the percentage your disposable income is, the less likely you are going to be willing to risk losing your job.

Goldenboy219 said:

Well..... To a point.

If we were to map out a persons total income from the time they worked, until the time they retired, and appropriated that based on the total consumption they will need until they die (and assuming you cannot find work instantly); taking a 10% cut in pay does not reduce your potential lifetime income (and your average yearly consumption which is a function of that said income) as much as getting laid off (long run). In the long run, the difference is incrementally marginal, as in it does not make a great difference. In the short run however, it makes quite a bit depending on time.

Say you begin working at age 20, and retire at age 65 with an initial salary (at age 20) of $25,000/year and living to age 80. For the sake of complexity, let us assume you are going to earn at least $25k/year for the next 45 years; you will have a life cycle income of $1,125,000. Given your estimated life span, you will be averaging a maximum consumption (assuming only income) of $18,750 per year on average. For added complexity, we can add say a 3% real annual expected increased in salary: [45/Σ/n=1] 25,000 + [((1-.97)x25,000)n+1] : and include a limit with period of time where your salary would decrease by 10% for two years, but doing so will only confuse and not have a significant effect on the theory.

A 10% cut in pay for two years results in a decrease of about $5,000 from your life cycle income to $1,120,000 resulting in a decreased maximum lifetime consumption average of $18,666.67 (or about $84/year).

The average time to find employment is about 19 weeks after you were first "released". This accounts to about $9,100 in lost income, or a decrease in your average life cycle income to the tune of : $18,598.33 or a decrease in $150/year. Does not seem so bad right? However, not everyone will live to 80.

In the short run however (as Tucker pointed out), the decline in potential standard of living is greater. Your max consumption average for two years (not considering financing) would be $20,450 as opposed to the $22,500 with taking the 10% cut. The shorter we draw this out, the greater impact it has on your standard of living. However, you only have a 10% risk of incurring such a reality so this really becomes a judgment call based on ones short term expectations. Keep in mind this does not include unemployment or taxation and is a simple illustration.

I am willing to assume that the lower the percentage your disposable income is, the less likely you are going to be willing to risk losing your job.

Click to expand...

For me, I'd be talking about being unemployed for like... a couple of weeks. It really wouldn't be a big deal and either option would be interchangeable with the other. I'd make enough on unemployment to cover my bills for two weeks, much like I would if I took a 10% pay cut for a couple of weeks.