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

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Author Info
Kugler, Adriana D. (Universitat Pompeu Fabra, Spain)
Saint-Paul, Gilles () (Universitat Pompeu Fabra, Spain, CEPR, London and IZA, Bonn)

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

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Length: 53 pages
Date of creation: Mar 2000
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Handle: RePEc:iza:izadps:dp134

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

Other versions of this item:

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings
J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing

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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.:
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    Other versions:
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  7. Di Tella, Rafael & MacCulloch, Robert, 2005. "The consequences of labor market flexibility: Panel evidence based on survey data," European Economic Review, Elsevier, vol. 49(5), pages 1225-1259, July. [Downloadable!] (restricted)
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  16. Alfonso Alba-Ramirez & Richard B. Freeman, 1990. "Jobfinding and Wages when Longrun Unemployment is Really Long: The Case of Spain," NBER Working Papers 3409, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October. [Downloadable!] (restricted)
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  23. Guasch, J Luis & Weiss, Andrew, 1981. "Self-Selection in the Labor Market," American Economic Review, American Economic Association, vol. 71(3), pages 275-84, June. [Downloadable!] (restricted)
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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. Wesselbaum, Dennis, 2009. "Firing Tax vs. Severance Payment - An Unequal Comparison," MPRA Paper 17637, University Library of Munich, Germany. [Downloadable!]
  2. 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). [Downloadable!]
  3. Agell, Jonas & Bennmarker, Helge, 2002. "Wage Policy and Endogenous Wage Rigidity: A Representative View from the Inside," Research Papers in Economics 2002:12, Stockholm University, Department of Economics. [Downloadable!]
  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 Labour Market Policy Evaluation. [Downloadable!]
  5. Grund, Christian, 2000. "Wages as Risk Compensation in Germany," IZA Discussion Papers 221, Institute for the Study of Labor (IZA). [Downloadable!]
  6. 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. [Downloadable!]
  7. Tito Boeri & Juan F. Jimeno, 2003. "The Effects of Employment Protection: Learning from Variable Enforcement," Working Papers 252, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  8. 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.). [Downloadable!]
  9. Modesto, Leonor, 2004. "Unions, Firing Costs and Unemployment," IZA Discussion Papers 1157, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  10. Jonas Agell & Helge Bennmarker, 2002. "Wage Policy and Endogenous Wage Rigidity: A Representative View From the Inside," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy. [Downloadable!]
  12. Dennis Wesselbaum, 2009. "Firing Costs in a New Keynesian Model with Endogenous Separations," Kiel Working Papers 1550, Kiel Institute for the World Economy. [Downloadable!]
  13. 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. [Downloadable!]
    Other versions:
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