We examine the welfare consequences of requiring firms to prioritize workers with low displacement costs for layoffs. Using linked employer–employee administrative data, we exploit a reform that raised the firm-size threshold for the applicability of German layoff-prioritization rules in a difference-in-differences design. Firms newly exempt from the rules shift layoffs toward older, longer-tenured workers and parents, indicating that the law previously constrained their layoff decisions along these dimensions. These displaced and newly unprotected workers experience larger earnings losses, spend more time unemployed, and draw more on unemployment insurance benefits. At the same time, newly exempt firms recover faster from shocks, with quicker rebounds in profits and employment. To evaluate welfare consequences implied by these patterns, we develop a search-and-matching model with worker heterogeneity in productivity and job-finding rates and introduce dismissal rules that require firms to dismiss high job-finding-rate workers before any low job-finding-rate workers. The model shows that prioritization can raise welfare by reallocating displacement toward workers with shorter expected nonemployment spells, but can also directly reduce output and create dynamic distortions in hiring. Moving forward, we plan to combine the model with our empirical estimates to characterize when layoff-prioritization rules increase social welfare.