This paper answers the efficient-turnover literature's long silence regarding the quit-layoff distinction. Treating quits as worker-initiated separations and layoffs as firm-initiated separations, I establish that the existence of layoffs is compatible with optimizing workers and firms forming and dissolving employment matches to exploit all the gains from trade. The efficient-turnover approach is shown to be consistent with many empirical regularities that distinguish quits from layoffs. Structural implications of the model are tested on data from the PSID.

This paper answers the efficient-turnover literature's long silence regarding the quit-layoff distinction. Treating quits as worker-initiated separations and layoffs as firm-initiated separations, I establish that the existence of layoffs is compatible with optimizing workers and firms forming and dissolving employment matches to exploit all the gains from trade. The efficient-turnover approach is shown to be consistent with many empirical regularities that distinguish quits from layoffs. Structural implications of the model are tested on data from the PSID.