This paper shows that the distortion induced by hold up in the private provision of training can justify the introduction of positive amount of firing tax in economies populated by risk neutral or perfectly insured agents. More precisely we highlight two results. First, an efficient economic policy, which makes use of a combination of a small lay-off taxes and hiring subsidies, always increases employment, productivity and welfare of unemployed workers. Second, in the case of no hiring subsidies, there is not a monotonic relationship between firing penalties and welfare, depending on the returns to training. In this case, an increase in the firing taxes causes an increase in job tenure and training but may be associated with lower market tightness if training returns are not high enough, confirming a trade off between adjustment costs and productivity gains related to employment protection. Implications of wage rigidity for newly hired workers are also considered.
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