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Labour Market Institutions and Macroeconomic Shocks

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  • Chen, Yu-Fu
  • Snower, Dennis J.
  • Zoega, Gylfi

Abstract

Macroeconomic shocks and labour-market institutions jointly determine employment growth and economic performance. The effect of shocks depends on the nature of these institutions and the effect of institutional change depends on the macroeconomic environment. It follows that a given set of institutions may be appropriate in one epoch and not in another. We derive a dynamic model of labour demand in which the effect of firing costs on labour demand depends on the macroeconomic environment: When the level of macroeconomic activity is expected to drop and/or the trend rate of productivity growth is small, a rise in firing costs affects mainly (and adversely) the hiring decision and not the layoff decision. This makes firing costs harmful to employment when it may appear most appropriate. In contrast, firing costs can raise employment during periods of high growth and poistive shocks. Our hypothesis is supported by empirical results using OECD data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3480.

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Date of creation: Aug 2002
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Handle: RePEc:cpr:ceprdp:3480

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Keywords: firing costs; hiring and firing; real options; stochastic demand;

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References

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Citations

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Cited by:
  1. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo Group Munich.
  2. Robert Krol & Shirley Svorny, 2007. "Unions and Employment Growth: Evidence from State Economic Recoveries," Journal of Labor Research, Springer, vol. 28(3), pages 525-535, July.
  3. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non-Wage Labour Costs," CESifo Working Paper Series 952, CESifo Group Munich.
  4. Martin Heipertz & Melanie Ward-Warmedinger, 2008. "Economic and Social Models in Europe and the Importance of Reform," Financial Theory and Practice, Institute of Public Finance, vol. 32(3), pages 255-287.
  5. Buscher, Herbert & Dreger, Christian & Ramos, Raul & Surinach, Jordi, 2005. "The Impact of Institutions on the Employment Performance in European Labour Markets," IZA Discussion Papers 1732, Institute for the Study of Labor (IZA).
  6. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy.
  7. Diaz-Vazquez, Pilar & Snower, Dennis J., 2004. "On-the-Job Training, Firing Costs and Employment," CEPR Discussion Papers 4241, C.E.P.R. Discussion Papers.
  8. Roger Bjørnstad & Kjartan Øren Kalstad, 2006. "Increased Price Markup from Union Coordination. OECD Panel Evidence," Discussion Papers 470, Research Department of Statistics Norway.
  9. Yu-Fu Chen & Gylfi Zoega, 2011. "Floating Exchange Rates as Employment Protection," DEGIT Conference Papers c016_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  10. Kim, Jaewon, 2011. "Why do Some Studies Show that Generous Unemployment Benefits Increase Unemployment Rates? A Meta-Analysis of Cross-Country Studies," Research Papers in Economics 2011:18, Stockholm University, Department of Economics.
  11. Hénin, Pierre-Yves & Weitzenblum, Thomas, 2003. "Employment protection and the stock market: The common shock case," CEPREMAP Working Papers (Couverture Orange) 0306, CEPREMAP.

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