The Effects of Firing Costs on Labour Market Dynamics

Using a search and matching model with distinct intensive and extensive labour margin choices and costly firing, we argue that firing costs can account for the observed cross‐country differences in the cyclical behaviour of labour market aggregates. More restrictive employment protection legislation is associated with larger fluctuations in job‐creation relative to job‐destruction flows, larger fluctuations in the intensive relative to extensive margin of labour, and a weaker short‐run Beveridge curve relation measured as the negative contemporaneous correlation between unemployment and vacancies. A calibrated version of our model can explain these empirical observations quantitatively. In the model, firms opt to adjust labour input more strongly along the hiring margin and the intensive margin of labour when firing costs are increased. Hence fluctuations in the job‐creation relative to job‐destruction flows, and fluctuations in the intensive relative to extensive margin of labour rise. Because hiring takes longer than firing, the substitution of the firing margin with the hiring margin leads to a more sluggish response of unemployment to shocks and hence weakens the negative contemporaneous correlation between unemployment and vacancies

Beveridge curve · Econometrics · Economics · Employment protection legislation · Job creation · Labour economics · Macroeconomics · Margin (machine learning) · Matching (statistics) · Unemployment · Unemployment rate · Firm Innovation and Growth · Labor market dynamics and wage inequality · Labor Movements and Unions

• Job Creation and Job Destruction in the Theory of Unemployment

  Dale T Mortensen, Christopher A Pissarides•The Review of Economic Studies•1994

  Añadir item

• The Cyclical Behavior of Equilibrium Unemployment and Vacancies

  Robert Shimer•American Economic Review•2005

  Añadir item

• Job Security Provisions and Employment

  Edward P Lazear•The Quarterly Journal of Economics•1990

  Añadir item

• Firing Costs and Labour Demand

  Samuel Bentolila, Giuseppe Bertola•The Review of Economic Studies•1990

  Añadir item

• On the Efficiency of Matching and Related Models of Search and Unemployment

  Arthur J Hosios•The Review of Economic Studies•1990

  Añadir item

• Job security, employment and wages

  Open Access•Giuseppe Bertola•European Economic Review•1990

  Añadir item

• Job Turnover and Policy Evaluation

  Hugo A Hopenhayn, Hugo Hopenhayn et al.•Journal of Political Economy•1993

  Añadir item

• Hiring Policies, Labor Market Institutions, and Labor Market Flows

  Michael J Pries, Michael Pries et al.•Journal of Political Economy•2005

  Añadir item

• Job Flow Dynamics and Firing Restrictions

  Open Access•Julián Messina, Giovanna Vallanti•The Economic Journal•2007

  Añadir item

• How do Lay‐off Costs Affect Employment

  Open Access•Lars Ljungqvist•The Economic Journal•2002

  Añadir item