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How Do Layoff Costs Affect Employment?

  • Ljungqvist, Lars
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    General equilibrium analysis of layoff costs have had mixed messages on the implications for employment. This Paper brings out the economic forces at work and explains the disparate results. Specifically, we show that positive employment effects of layoff costs come through reducing labour reallocation, whereas negative effects come through reducing the private return to work due to those layoff costs and the associated inefficient allocation of labour. Additional adverse employment effects can arise through an increase in the effective bargaining strength of workers. These forces explain why layoff costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how layoff costs are assumed to enter the bargaining process.

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    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3051
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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3051.

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    Date of creation: Nov 2001
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    Handle: RePEc:cpr:ceprdp:3051
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    1. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
    2. Fernando Alvarez & Marcel Veracierto, 1998. "Search, self-insurance and job-security provisions," Working Paper Series WP-98-2, Federal Reserve Bank of Chicago.
    3. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," SSE/EFI Working Paper Series in Economics and Finance 178, Stockholm School of Economics.
    4. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
    5. Pissarides, Christopher A, 1985. "Taxes, Subsidies, and Equilibrium Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 121-33, January.
    6. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
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