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Employment Protection and Unemployment in an Efficiency Wage Model

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  • Maia Güell

Abstract

Firing costs are often blamed for unemployment. This paper investigates this well spread belief. The main points are two. First, firing costs are modelled in an efficiency wage model to capture their effects on employment through wages. Secondly, dismissal conflicts are modelled explicitly. In the context of imperfectly observable effort, a double moral hazard problem can arise and in turn firing costs reduced employment because they increase the rent to be paid to workers. The determinants of the double moral hazard problem such as the imprecise definition of dismissal causes are analysed. The main policy conclusion is that focus should move onto the clarification of the different causes of dismissal to minimise the room of interpretation. If so, then high enough severance payments in case of 'unfair' dismissals can actually have a punishment role and prevent the double moral hazard problem.

Suggested Citation

  • Maia Güell, 2000. "Employment Protection and Unemployment in an Efficiency Wage Model," CEP Discussion Papers dp0463, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0463
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    References listed on IDEAS

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    1. Nickell, Stephen & Nunziata, Luca, 2000. "Employment patterns in OECD countries," LSE Research Online Documents on Economics 20198, London School of Economics and Political Science, LSE Library.
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    More about this item

    Keywords

    Firing costs; efficiency wages; unfair dismissal;
    All these keywords.

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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