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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 Journal of Behavioral and Experimental Economics (formerly 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

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Keywords: Variable firing costs Multiple equilibria Efficiency;

References

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  1. Pietro Garibaldi & Giovanni L. Violante, 2005. "The Employment Effects of Severance Payments with Wage Rigidities," Economic Journal, Royal Economic Society, vol. 115(506), pages 799-832, October.
  2. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October.
  3. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  4. Giulio Fella, 2007. "Optimal Severance Pay in a Matching Model," Working Papers 598, Queen Mary, University of London, School of Economics and Finance.
  5. 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.
  6. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  7. Saint-Paul, Gilles, 1992. "The High Unemployment Trap," CEPR Discussion Papers 670, C.E.P.R. Discussion Papers.
  8. 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.
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  10. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  11. Cahuc, Pierre & Zylberberg, André, 2008. "Optimum income taxation and layoff taxes," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2003-2019, October.
  12. Mortensen, Dale T & Pissarides, Christopher A, 1999. "Unemployment Responses to 'Skill-Biased' Technology Shocks: The Role of Labour Market Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 242-65, April.
  13. L'Haridon, Olivier & Malherbe, Franck, 2008. "Employment protection reform in search economies," Les Cahiers de Recherche 910, HEC Paris.
  14. Riccardo Tilli & Enrico Saltari, 2008. "Do labor market conditions affect the strictness of employment protection legislation?," Economics Bulletin, AccessEcon, vol. 10(4), pages 1-9.
  15. Pierre Cahuc & Franck Malherbet, 2001. "Unemployment Compensation Finance and Labor Market Rigidity," Working Papers 2001-37, Centre de Recherche en Economie et Statistique.
  16. Usui, Emiko, 2007. "Severance payments in equilibrium unemployment," Economics Letters, Elsevier, vol. 94(3), pages 342-347, March.
  17. Olivier Blanchard, 2005. "European Unemployment: The Evolution of Facts and Ideas," NBER Working Papers 11750, National Bureau of Economic Research, Inc.
  18. 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.
  19. 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.
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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.
  2. Addessi, William & Saltari, Enrico & Tilli, Riccardo, 2014. "R&D, innovation activity, and the use of external numerical flexibility," Economic Modelling, Elsevier, vol. 36(C), pages 612-621.

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