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Non-Wage Labour Costs, Policy Uncertainty and Labour Demand - a Theoretical Assessment

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Author Info
Yu-Fu Chen ()
Michael Funke ()

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Abstract

Labour costs in various European countries have reached a record high in recent years. The topic of non-wage labour costs is therefore increasingly being discussed among and between the political parties because non-wage labour costs are likely to have major negative effects on employment. We follow the real options approach, which allows us to investigate the value to a firm of waiting to adjust labour when the firm´s wage and non-wage costs are stochastic and adjustment costs are sunk. Simulation exercises show that the interaction between hiring and firing costs, non-wage labour costs and uncertainty can have important ramifications for employment dynamics.

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Publisher Info
Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 20511.

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Date of creation: Nov 2005
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Handle: RePEc:ham:qmwops:20511

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Related research
Keywords: product Market Competition; Regulation; Real Options; Investment; Empolyment;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Orszag, J. Michael & Snower, Dennis J., 1998. "Anatomy of Policy Complementarities," Working Paper Series 500, Research Institute of Industrial Economics.
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  2. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-39, December. [Downloadable!] (restricted)
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  3. Dixit, Avinash, 1997. "Investment and Employment Dynamics in the Short Run and the Long Run," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 1-20, January. [Downloadable!] (restricted)
  4. Yu-Fu Chen & I-Hui Cheng, 2005. "Protection and employment under uncertainty: a real option approach," Applied Economics, Taylor and Francis Journals, vol. 37(2), pages 229-238, February. [Downloadable!] (restricted)
  5. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August. [Downloadable!] (restricted)
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  6. Kugler, Adriana & Kugler, Maurice, 2003. "The Labor Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia," IZA Discussion Papers 852, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(3), pages 691-721.
  8. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 381-402, July. [Downloadable!] (restricted)
  9. Alison L. Booth & Yu-Fu Chen & Gylfi Zoega, 2002. "Hiring and Firing: A Tale of Two Thresholds," Journal of Labor Economics, University of Chicago Press, vol. 20(2), pages 217-248, Part. [Downloadable!]
  10. Bertrand, Marianne & Kramarz, Francis, 2002. "Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry," IZA Discussion Papers 415, Institute for the Study of Labor (IZA). [Downloadable!]
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  11. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August. [Downloadable!] (restricted)
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  12. Bovenberg, A. Lans & Graafland, Johan J. & de Mooij, Ruud A., 2000. "Tax reform and the Dutch labor market: an applied general equilibrium approach," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 193-214, October. [Downloadable!] (restricted)
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  13. 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. [Downloadable!] (restricted)
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  14. Chen, Yu-Fu & Snower, Dennis J. & Zoega, Gylfi, 2002. "Labour Market Institutions and Macroeconomic Shocks," CEPR Discussion Papers 3480, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567. [Downloadable!] (restricted)
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  17. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September. [Downloadable!] (restricted)
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  18. Acemoglu, Daron & Aghion, Philippe & Zilibotti, Fabrizio, 2002. "Distance to Frontier, Selection, and Economic Growth," CEPR Discussion Papers 3467, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  19. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144. [Downloadable!] (restricted)
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  20. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March. [Downloadable!] (restricted)
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  21. Coe, David T & Snower, Dennis J., 1997. "Policy Complementarities: The Case for Fundamental Labour Market Reform," CEPR Discussion Papers 1585, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  22. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May. [Downloadable!] (restricted)
  23. Minford, Patrick & Naraidoo, Ruthira, 2002. "Vicious and Virtuous Circles - The Political Economy of Unemployment," CEPR Discussion Papers 3618, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  24. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 1-54. [Downloadable!]
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  27. Yu-Fu Chen & Michael Funke, 2004. "Working Time and Employment under Uncertainty," Quantitative Macroeconomics Working Papers 20409, Hamburg University, Department of Economics. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Frank Oskamp & Dennis J. Snower, 2006. "The Effect of Low-Wage Subsidies on Skills and Employment," Kiel Working Papers 1292, Kiel Institute for the World Economy. [Downloadable!]
  2. Alessio J. G. Brown & Dennis Snower, 2009. "Incentives and Complementarities of Flexicurity," Kiel Working Papers 1526, Kiel Institute for the World Economy. [Downloadable!]
  3. Frank Oskamp & Dennis J. Snower, 2007. "Interactions between Employment and Training Policies," Kiel Working Papers 1389, Kiel Institute for the World Economy. [Downloadable!]
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