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An essay on the generational effect of employment protection

  • Yu-Fu Chen
  • Gylfi Zoega

    (Department of Economics, Mathematics & Statistics, Birkbeck)

This paper provides an explanation for the observed positive relationship between youth unemployment and the cost of firing workers. When the cost of firing workers is high, firms only fire when the present discounted value of future losses is high, in which case they gain little by postponing the firing decision in the hope that productivity will recover. The young workers are then the first to go due to their longer remaining tenure. In contrast, when the cost of firing workers is low, the present discounted value of future losses is small at the firing margin and firms may choose to wait in the hope of a recovery. In this case they may choose to fire the older workers first since the younger ones are more likely to be around when productivity recovers.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0915.pdf
File Function: First version, 2009
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0915.

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Date of creation: Nov 2009
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Handle: RePEc:bbk:bbkefp:0915
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  14. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  15. Chen, Yu-Fu & Snower, Dennis J. & Gylfi, Zoega, 1999. "Firing Costs: Eurosclerosis or Eurosuccesses?," HWWA Discussion Papers 78, Hamburg Institute of International Economics (HWWA).
  16. Jimeno, Juan F. & Rodriguez-Palenzuela, Diego, 2002. "Youth unemployment in the OECD: demographic shifts, labour market institutions, and macroeconomic shocks," Working Paper Series 0155, European Central Bank.
  17. Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 9(2), pages 207-211, June.
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  19. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  20. Chen, Yu-Fu & Zoega, Gylfi, 1999. "On the effectiveness of firing costs1," Labour Economics, Elsevier, vol. 6(3), pages 335-354, September.
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