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How Do Layoff Costs Affect Employment?

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  • Ljungqvist, Lars
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    Abstract

    General equilibrium analysis of layoff costs have had mixed messages on the implications for employment. This Paper brings out the economic forces at work and explains the disparate results. Specifically, we show that positive employment effects of layoff costs come through reducing labour reallocation, whereas negative effects come through reducing the private return to work due to those layoff costs and the associated inefficient allocation of labour. Additional adverse employment effects can arise through an increase in the effective bargaining strength of workers. These forces explain why layoff costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how layoff costs are assumed to enter the bargaining process.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3051.

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    Date of creation: Nov 2001
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    Handle: RePEc:cpr:ceprdp:3051

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    Related research

    Keywords: layoff costs; unemployment;

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    References

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    1. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
    2. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
    3. Lars Ljungqvist & Thomas J. Sargent, 1995. "The European unemployment dilemma," Working Paper Series, Macroeconomic Issues 95-17, Federal Reserve Bank of Chicago.
    4. Fernando Alvarez & Marcel Veracierto, 1998. "Search, self-insurance and job-security provisions," Working Paper Series WP-98-2, Federal Reserve Bank of Chicago.
    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. Pissarides, Christopher A, 1985. "Taxes, Subsidies, and Equilibrium Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 121-33, January.
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    Cited by:
    1. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy.
    2. Julia Fath & Clemens Fuest, 2005. "Temporary Layoffs and Unemployment Insurance: Is Experience Rating Desirable?," German Economic Review, Verein für Socialpolitik, vol. 6(4), pages 471-483, November.
    3. Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
    4. Dennis Wesselbaum, 2009. "Firing Costs in a New Keynesian Model with Endogenous Separations," Kiel Working Papers 1550, Kiel Institute for the World Economy.

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