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Endogenous Firing Costs and Labor Market Equilibrium

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  • Enrico Saltari
  • Riccardo Tilli

Abstract

We explore the macroeconomic implications of the inverse relationship between firing costs and labor market tightness, evaluating its effects on labor market performance in a matching model `a la Mortensen and Pissarides (1994). Results are clear cut and generalizes our previous work. First, different configurations of the labor market structure deriving from the optimal behavior of the economic agents give rise to multiple equilibria: high average duration of unemployment will produce a labor market with low flows and wage and high strictness of employment protection. Vice versa, short duration in the unemployment status will produce high flows and wage and low level of firing costs. Furthermore, the endogeneity of firing costs and the positive externality they produce in the market is able to modify the nature of the steady state equilibrium. When the firing costs externality dominates the search costs externality, we show that the equilibrium is characterized by indeterminacy. Otherwise, when search costs are relevant, the equilibrium is a saddle point. Finally, endogenous firing costs also affect the determination of the social optimum, since it requires to internalize two kinds of externalities.

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Bibliographic Info

Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 89.

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Length: 24
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:sap:wpaper:wp89

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Related research

Keywords: Firing Costs; Multiple Equilibria; Efficiency.;

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  1. Andrea Ichino & Michele Polo & Enrico Rettore, . "Are Judges Biased by Labor Market Conditions?," Working Papers 192, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Boeri, Tito & Conde-Ruiz, José Ignacio & Galasso, Vincenzo, 2003. "Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?," CEPR Discussion Papers 3990, C.E.P.R. Discussion Papers.
  3. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323.
  4. Olivier Blanchard & Pedro Portugal, 1998. "What Hides Behind An Unemployment Rate: Comparing Portuguese and Us Unemployment," Working Papers w199803, Banco de Portugal, Economics and Research Department.
  5. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  6. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  8. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  9. Siegelman, Peter & Donohue, John J, III, 1995. "The Selection of Employment Discrimination Disputes for Litigation: Using Business Cycle Effects to Test the Priest-Klein Hypothesis," The Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 427-62, June.
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