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How Effective Are Firing Costs?


  • Yu-Fu Chen
  • Gylfi Zoega


This paper derives the effect of state-mandated redundancy payments on a firm's firing decision as a function of the characteristics of its stochastic environment. We both summarize the main determinants of the effectiveness of firing costs using numerical simulations and point out some important considerations in evaluating their significance. In particular, we find that the effect of firing costs is very sensitive to the rate of growth of productivity, the rate of interest, workers' quit rate and the persistence of productivity shocks in addition to the level of uncertainty. The fall in trend productivity growth in the past two decades, accompanied by a rise in real interest rates and a possible increase in the persistence of labour demand shocks should have made employment more sensitive to cyclical downturns.

Suggested Citation

  • Yu-Fu Chen & Gylfi Zoega, 1996. "How Effective Are Firing Costs?," Archive Discussion Papers 9615, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkewp:9615

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    More about this item


    Firing costs; productivity growth; persistence of labour demand shocks.;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings


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