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Author Info

  • Postel-Vinay, Fabien

    ()
    (University College London)

  • Turon, Hélène

    ()
    (University of Bristol)

Abstract

Job-to-job turnover provides a way for employers to escape statutory firing costs, as unprofitable workers may willfully quit their job on receiving an outside offer, thus sparing their incumbent employer the firing costs. Furthermore, employers can induce their unprofitable workers to accept outside job offers that they would otherwise reject by offering voluntary severance packages, which are less costly than the full statutory firing cost. We formalize those mechanisms within an extension of the Diamond-Mortensen-Pissarides (DMP) matching model that allows for employed job search and negotiation over severance packages. We find that, while essentially preserving most standard qualitative predictions of the DMP model without employed job search, our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment. We further find that allowing for on-the-job search markedly changes the quantitative predictions of the DMP model regarding the impact of firing costs on unemployment and employment flows: ignoring on-the-job search leads one to strongly underestimate the negative impact of firing costs on unemployment.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6023.

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Length: 38 pages
Date of creation: Oct 2011
Date of revision:
Publication status: published as 'The Impact of Firing Restrictions on Labour Market Equilibrium in the Presence of On-the-job Search' in: Economic Journal, 2014, 124 (575), 31-61.
Handle: RePEc:iza:izadps:dp6023

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Related research

Keywords: mutual consent; on-the-job search; firing costs; minimum wage;

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References

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  1. Zylberberg, Andre & Cahuc, Pierre, 1999. "Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare," IZA Discussion Papers 96, Institute for the Study of Labor (IZA).
  2. Fabien Postel-Vinay & Hélène Turon, 2005. "On-the-job Search, Productivity Shocks, and the Individual Earnings Process," PSE Working Papers halshs-00590726, HAL.
  3. Fella, Giulio, 2007. "When do firing taxes matter?," Economics Letters, Elsevier, vol. 97(1), pages 24-31, October.
  4. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
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Cited by:
  1. Giulio Fella, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," Working Papers 698, Queen Mary, University of London, School of Economics and Finance.
  2. Bartelsman, Eric J & de Wind, Joris & Gautier, Pieter A., 2010. "Employment Protection, Technology Choice, and Worker Allocation," CEPR Discussion Papers 7806, C.E.P.R. Discussion Papers.

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