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The role and significance of endogenous firing costs in a matching model with endogenous job destruction

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  • Saltari, Enrico
  • Tilli, Riccardo

Abstract

Traditional models of the labor market assume fixed firing costs. This paper explores the implications of variable firing costs, building this new assumption into a matching model with endogenous job destruction. The available evidence on the outcomes of cases brought to labor courts suggests that firing costs are negatively related with labor market tightness. In such a case, we may no longer invoke "rigidities" on labor markets as the cause of their poor performance. Our model yields three interesting results. First, labor markets may have multiple equilibria that cannot be Pareto-ordered; each with its own configuration in terms of average duration of unemployment and filled jobs, as well as employment protection. Second, the variability of firing costs produces a positive externality affecting the stability properties of these equilibria. Finally, the two externalities affect the efficiency of the social optimum, modifying the Hosios [Hosios, A.J., 1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57, 279-298] condition. We use these results to interpret the recent history of European unemployment.

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Bibliographic Info

Article provided by Elsevier in its journal The Journal of Socio-Economics.

Volume (Year): 38 (2009)
Issue (Month): 5 (October)
Pages: 799-808

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Handle: RePEc:eee:soceco:v:38:y:2009:i:5:p:799-808

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Web page: http://www.elsevier.com/locate/inca/620175

Related research

Keywords: Variable firing costs Multiple equilibria Efficiency;

References

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  1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
  2. Garibaldi, Pietro & Violante, Giovanni L, 2004. "The Employment Effects of Severance Payments with Wage Rigidities," CEPR Discussion Papers 4608, C.E.P.R. Discussion Papers.
  3. Giulio Fella, 2007. "Optimal Severance Pay in a Matching Model," Working Papers 598, Queen Mary, University of London, School of Economics and Finance.
  4. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  5. Olivier L'Haridon & Franck Malherbet, 2008. "Employment Protection Reform in Search Economies," THEMA Working Papers 2008-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  6. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
  7. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  8. Olivier Blanchard, 2006. "European unemployment: the evolution of facts and ideas," Economic Policy, CEPR & CES & MSH, vol. 21(45), pages 5-59, 01.
  9. Stephen Nickell & Luca Nunziata & Wolfgang Ochel, 2005. "Unemployment in the OECD Since the 1960s. What Do We Know?," Economic Journal, Royal Economic Society, vol. 115(500), pages 1-27, 01.
  10. Saint-Paul, Gilles, 1995. "The High Unemployment Trap," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 527-50, May.
  11. Blanchard, Olivier Jean & Summers, Lawrence H, 1988. "Beyond the Natural Rate Hypothesis," American Economic Review, American Economic Association, vol. 78(2), pages 182-87, May.
  12. Pierre Cahuc & Franck Malherbet, 2001. "Unemployment Compensation Finance and Labor Market Rigidity," Working Papers 2001-37, Centre de Recherche en Economie et Statistique.
  13. Cahuc, Pierre & Zylberberg, André, 2008. "Optimum income taxation and layoff taxes," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2003-2019, October.
  14. Andrea Ichino & Michele Polo & Enrico Rettore, . "Are Judges Biased by Labor Market Conditions?," Working Papers 192, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  15. Enrico Saltari & Riccardo Tilli, 2004. "Labor Market Performance and Flexibility: Which Comes First?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 0(1), pages 5.
  16. Usui, Emiko, 2007. "Severance payments in equilibrium unemployment," Economics Letters, Elsevier, vol. 94(3), pages 342-347, March.
  17. Siegelman, Peter & Donohue, John J, III, 1995. "The Selection of Employment Discrimination Disputes for Litigation: Using Business Cycle Effects to Test the Priest-Klein Hypothesis," The Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 427-62, June.
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Cited by:
  1. William Addessi & Enrico Saltari & Riccardo Tilli, 2011. "R&D and Innovation Activities and the Use of External Numerical Flexibility," Working Papers 150, University of Rome La Sapienza, Department of Public Economics.

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