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How Do Firing Costs Affect Worker Flows in a World with Adverse Selection?

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  • Adriana D. Kugler

    (University of Houston, Universitat Pompeu Fabra, CEPR, and CREA)

  • Gilles Saint-Paul

    (Universite de Toulouse and CEPR)

Abstract

This article provides theoretical and empirical analyses of a firing costs model with adverse selection. Our theory suggests that, as firing costs increase, firms increasingly prefer hiring employed workers, who are less likely to be lemons. Estimates of re-employment probabilities from the National Longitudinal Survey of Youth support this prediction. Unjust-dismissal provisions in U.S. states reduce the re-employment probabilities of unemployed workers relative to employed workers. Consistent with a lemons story, the relative effects of unjust-dismissal provisions on the unemployed are generally smaller for union workers and those who lost their previous jobs due to the end of a contract.

Suggested Citation

  • Adriana D. Kugler & Gilles Saint-Paul, 2004. "How Do Firing Costs Affect Worker Flows in a World with Adverse Selection?," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 553-584, July.
  • Handle: RePEc:ucp:jlabec:v:22:y:2004:i:3:p:553-584
    DOI: 10.1086/383107
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    References listed on IDEAS

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