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Firing costs in a business cycle model with endogenous separations

Author

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  • Dennis Wesselbaum

Abstract

Purpose - – The purpose of this paper is to introduce productivity-dependent firing costs into an otherwise standard endogenous separations matching model. The authors suggest an alternative to the standard fix cost approach and account for empirical evidence emphasizing that firing costs vary across workers. The authors show that the model with firing costs outperformes the model without firing costs and replicates the empirical facts fairly well. Furthermore, the authors present cross-country evidence that countries with stricter employment protection have a weaker Beveridge curve relation and surprisingly more volatile job flow rates. Design/methodology/approach - – The authors begin the analysis at the intersection of labor and product markets. For this purpose, the authors derive a real business cycle model with search and matching frictions and endogenous separations. The authors enrich this set-up by introducing productivity-dependent firing costs. Findings - – The authors show that the model with firing costs outperformes the model without firing costs and replicates the empirical facts fairly well. Furthermore, the authors present cross-country evidence that countries with stricter employment protection have a weaker Beveridge curve relation and surprisingly more volatile job flow rates. Originality/value - – This paper introduces productivity-dependent firing costs into an otherwise standard endogenous separations matching model. The authors suggest an alternative to the standard fix cost approach and account for empirical evidence emphasizing that firing costs vary across workers. The authors show that the model with firing costs outperformes the model without firing costs and replicates the empirical facts fairly well. Furthermore, the authors present cross-country evidence that countries with stricter employment protection have a weaker Beveridge curve relation and surprisingly more volatile job flow rates.

Suggested Citation

  • Dennis Wesselbaum, 2015. "Firing costs in a business cycle model with endogenous separations," Journal of Economic Studies, Emerald Group Publishing, vol. 42(3), pages 499-518, August.
  • Handle: RePEc:eme:jespps:v:42:y:2015:i:3:p:499-518
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    References listed on IDEAS

    as
    1. Brown, Alessio & Merkl, Christian & Snower, Dennis, 2015. "An Incentive Theory Of Matching," Macroeconomic Dynamics, Cambridge University Press, vol. 19(03), pages 643-668, April.
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    8. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-959, November.
    9. Juan J. Dolado & Marcel Jansen & Juan F. Jimeno, 2005. "Dual employment protection legislation: a framework for analysis," Working Papers 0510, Banco de España;Working Papers Homepage.
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    More about this item

    Keywords

    Firing costs; Beveridge curve; Endogenous separations;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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