Wage rigidity has long been considered a main source of employment fluctuations. By contrast, I propose a theory in which rigid wages and layoffs arise endogenously and are correlated across workers and firms, yet rigid wages do not cause layoffs. Intuitively, layoffs help firms improve workforce composition, making wage cuts less desirable. I build an equilibrium search model where firms employ risk-averse workers of heterogeneous match quality on dynamic contracts. Asymmetric information about match quality generates privately inefficient layoffs: firms hold private information they choose not to disclose. After negative productivity shocks, firms fire low-quality matches while smoothing survivors’ wages. The model predicts heterogeneous composition of insurance: recently hired workers face higher layoff risk, whereas senior workers experience larger wage movements. I confirm this pattern using French matched employer–employee data. The model further implies that, when rigid wages and layoffs have endogenous foundations, additional exogenous wage rigidity has limited effects on employment. A calibration shows that a 20% minimum wage hike has only muted effects on firing and hiring rates.