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Hiring and Firing Costs, Adverse Selection and Long-term Unemployment

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  • Kugler, Adriana

    ()
    (Georgetown University)

  • Saint-Paul, Gilles

    ()
    (University of Toulouse I)

Abstract

In this paper, we present a matching model with adverse selection that explains why flows into and out of unemployment are much lower in Europe compared to North America, while employment-to-employment flows are similar in the two continents. In the model, firms use discretion in terms of whom to fire and, thus, low quality workers are more likely to be dismissed than high quality workers. Moreover, as hiring and firing costs increase, firms find it more costly to hire a bad worker and, thus, they prefer to hire out of the pool of employed job seekers rather than out of the pool of the unemployed, who are more likely to turn out to be `lemons’. We use microdata for Spain and the U.S. and find that the ratio of the job finding probability of the unemployed to the job finding probability of employed job seekers was smaller in Spain than in the U.S.. Furthermore, using U.S. data, we find that the discrimination of the unemployed increased over the 1980’s in those states that raised firing costs by introducing exceptions to the employment-at-will doctrine.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 134.

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Length: 54 pages
Date of creation: Mar 2000
Date of revision:
Publication status: published in: Journal of Labor Economics, 2004, 22(3), 553-584.
Handle: RePEc:iza:izadps:dp134

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Keywords: Adverse selection; turnover costs; unemployment; worker flows; matching models; discrimination;

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References

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  4. Garibaldi, Pietro, 1998. "Job flow dynamics and firing restrictions," European Economic Review, Elsevier, vol. 42(2), pages 245-275, February.
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  23. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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Citations

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Cited by:
  1. Dennis Wesselbaum, 2009. "Firing Costs in a New Keynesian Model with Endogenous Separations," Kiel Working Papers 1550, Kiel Institute for the World Economy.
  2. Simon Burgess & Helene Turon, 2005. "Worker Flows, Job Flows and Unemployment in a Matching Model," Bristol Economics Discussion Papers 05/572, Department of Economics, University of Bristol, UK.
  3. Tito Boeri, 2004. "The Effects of Employment Protection: Learning from Variable Enforcement," 2004 Meeting Papers 445a, Society for Economic Dynamics.
  4. Agell, Jonas & Bennmarker, Helge, 2002. "Wage policy and endogenous wage rigidity: a representative view from the inside," Working Paper Series 2002:12, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  5. Bassanini, Andrea & Ernst, Ekkehard, 2001. "Labour market regulation, industrial relations, and technological regimes: a tale of comparative advantage," CEPREMAP Working Papers (Couverture Orange) 0117, CEPREMAP.
  6. Andrea De Michelis, 2004. "Sand in the wheels of the labor market: the effect of firing costs on employment," International Finance Discussion Papers 796, Board of Governors of the Federal Reserve System (U.S.).
  7. Leonor Modesto, 2008. "Unions, Firing Costs, and Unemployment," LABOUR, CEIS, vol. 22(3), pages 509-546, 09.
  8. Wesselbaum, Dennis, 2009. "Firing Tax vs. Severance Payment - An Unequal Comparison," MPRA Paper 17637, University Library of Munich, Germany.
  9. Schwarze, Johannes, 2000. "Using Panel Data on Income Satisfaction to Estimate the Equivalence Scale Elasticity," IZA Discussion Papers 224, Institute for the Study of Labor (IZA).
  10. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy.
  11. Grund, Christian, 2000. "Wages as Risk Compensation in Germany," IZA Discussion Papers 221, Institute for the Study of Labor (IZA).

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