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Endogenous Labor Force Participation and Firing Costs

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  • Moon, Weh-Sol

Abstract

I construct a matching model to explain the labor market transition between employment, unemployment and nonparticipation, and evaluate the quantitative effects of firing costs. The model has several features that are distinguished from previous studies: endogenous labor force participation, different job-search decisions and imperfect insurance markets. I find that the model is able to account for the U.S. labor market, especially the gross labor-force transition rates. I also find that firing costs as a type of firing tax have a negative effect on the layoff rate, the job-finding probability and the participation rate. In particular, the effect of a decrease in the job-finding probability is greater than the effect of a decrease in the layoff rate, and this results in an increase in the unemployment-to-population ratio. Finally, firing costs make individuals' job tenures longer and skew the asset distribution to the right.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15749.

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Date of creation: 21 May 2009
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Handle: RePEc:pra:mprapa:15749

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Keywords: Search and Matching; Labor Force Participation; Firing Costs;

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Cited by:
  1. Ekkehard Ernst & Uma Rani, 2011. "Understanding unemployment flows," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 27(2), pages 268-294.

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