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Employment protection and the stock market: The common shock case

  • Hénin, Pierre-Yves
  • Weitzenblum, Thomas

This paper considers the consequences of employment protection with a fully diversified stock market when firms face a common shock. The analysis focuses on the interaction between employment protection and stock market when wages are sluggish or fixed. We build and calibrate a dynamic model where firms decide upon capital utilization, investment, vacancy posting and lay-offs in order to maximize shareholder value. Public policy, devoted to employment protection, is parametrized through firing costs. Due to the capital and employment irreversibilities, the model has to be solved using numerical techniques. Two series of scenarii are presented, first considering the effect of alternative level of firing costs i a benchmark economy, thus examining interactions between firing cost and successively, i) higher market price of risk, ii) higher separation rates, iii) fixed wages, iv) fixed capital utilization.

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Paper provided by CEPREMAP in its series CEPREMAP Working Papers (Couverture Orange) with number 0306.

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Length: 27 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:cpm:cepmap:0306
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  12. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
  13. Luca Nunziata, 2002. "Unemployment, Labour Market Institutions and Shocks," Economics Papers 2002-W16, Economics Group, Nuffield College, University of Oxford.
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  17. Ambler, Steve & Paquet, Alain, 1994. "Stochastic Depreciation and the Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 101-16, February.
  18. repec:oup:qjecon:v:105:y:1990:i:3:p:699-726 is not listed on IDEAS
  19. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
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