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Hiring and firing costs, adverse selection and long-term unemployment

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  • Adriana D. Kugler
  • Gilles Saint Paul

Abstract

In this paper, we present a matching model with adverse selection that explains why flows into and out of unemployment are much lower in Europe compared to North America, while employment-to-employment flows are similar in the two continents. In the model,firms use discretion in terms of whom to fire and, thus, low quality workers are more likely to be dismissed than high quality workers. Moreover, as hiring and firing costs increase, firms find it more costly to hire a bad worker and, thus, they prefer to hire out of the pool of employed job seekers rather than out of the pool of the unemployed, who are more likely to turn out to be 'lemons'. We use microdata for Spain and the U.S. and find that the ratio of the job finding probability of the unemployed to the job finding probability of employed job seekers was smaller in Spain than in the U.S. Furthermore, using U.S. data, we find that the discrimination of the unemployed increased over the 1980's in those states that raised firing costs by introducing exceptions to the employment-at-will doctrine.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 447.

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Date of creation: Feb 2000
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Handle: RePEc:upf:upfgen:447

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Adverse selection; turnover costs; unemployment; worker flows; matching models; discrimination;

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Citations

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Cited by:
  1. Boeri, Tito & Jimeno, Juan F., 2005. "The effects of employment protection: Learning from variable enforcement," European Economic Review, Elsevier, vol. 49(8), pages 2057-2077, November.
  2. Schwarze, Johannes, 2000. "Using Panel Data on Income Satisfaction to Estimate the Equivalence Scale Elasticity," IZA Discussion Papers 224, Institute for the Study of Labor (IZA).
  3. Andrea De Michelis, 2004. "Sand in the wheels of the labor market: the effect of firing costs on employment," International Finance Discussion Papers 796, Board of Governors of the Federal Reserve System (U.S.).
  4. Agell, Jonas & Bennmarker, Helge, 2002. "Wage policy and endogenous wage rigidity: a representative view from the inside," Working Paper Series 2002:12, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  5. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy.
  6. Simon Burgess & Helene Turon, 2005. "Worker Flows, Job Flows and Unemployment in a Matching Model," Bristol Economics Discussion Papers 05/572, Department of Economics, University of Bristol, UK.
  7. Wesselbaum, Dennis, 2009. "Firing Tax vs. Severance Payment - An Unequal Comparison," MPRA Paper 17637, University Library of Munich, Germany.
  8. Dennis Wesselbaum, 2009. "Firing Costs in a New Keynesian Model with Endogenous Separations," Kiel Working Papers 1550, Kiel Institute for the World Economy.
  9. Bassanini, Andrea & Ernst, Ekkehard, 2001. "Labour market regulation, industrial relations, and technological regimes: a tale of comparative advantage," CEPREMAP Working Papers (Couverture Orange) 0117, CEPREMAP.
  10. Modesto, Leonor, 2004. "Unions, Firing Costs and Unemployment," IZA Discussion Papers 1157, Institute for the Study of Labor (IZA).
  11. Grund, Christian, 2000. "Wages as Risk Compensation in Germany," IZA Discussion Papers 221, Institute for the Study of Labor (IZA).

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