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Labour-Market Institutions and Macroeconomic Shocks

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Author Info

  • Chen, Yu-Fu

    ()
    (University of Dundee)

  • Snower, Dennis J.

    ()
    (Kiel Institute for the World Economy)

  • Zoega, Gylfi

    ()
    (Birkbeck College, University of London)

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 at certain times in some countries while not appropriate elsewhere. 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 firing decision. This makes firing costs harmful when they may appear to be most appropriate. The intuition behind these results is quite straightforward: When managers fear that demand may fall in the future they value the right to fire workers. It follows that by making this option more costly, firing costs reduce the value of workers with adverse consequences for hiring and firing.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 539.

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Length: 26 pages
Date of creation: Jul 2002
Date of revision:
Publication status: published in: Labour, 2003, 17(2), 247-270
Handle: RePEc:iza:izadps:dp539

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

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References

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Citations

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Cited by:
  1. 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.
  2. 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).
  3. Roger Bjørnstad & Kjartan Øren Kalstad, 2006. "Increased Price Markup from Union Coordination. OECD Panel Evidence," Discussion Papers 470, Research Department of Statistics Norway.
  4. Yu-Fu Chen & Gylfi Zoega, 2011. "Floating Exchange Rates as Employment Protection," DEGIT Conference Papers c016_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  5. 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.
  6. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo Group Munich.
  7. Diaz-Vazquez, Pilar & Snower, Dennis J., 2003. "On-the-Job Training, Firing Costs and Employment," IZA Discussion Papers 910, Institute for the Study of Labor (IZA).
  8. 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.
  9. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy.
  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. Henin, Pierre-Yves & Weitzenblum, Thomas, 2005. "Employment protection and the stock market: the common shock case," Economic Modelling, Elsevier, vol. 22(1), pages 127-146, January.

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