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Labour Market Institutions and Macroeconomic Shocks

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  • Chen, Yu-Fu
  • Snower, Dennis J.
  • Zoega, Gylfi

Abstract

Macroeconomic shocks and labour-market institutions jointly determine employment growth and economic performance. The effect of shocks depends on the nature of these institutions and the effect of institutional change depends on the macroeconomic environment. It follows that a given set of institutions may be appropriate in one epoch and not in another. We derive a dynamic model of labour demand in which the effect of firing costs on labour demand depends on the macroeconomic environment: When the level of macroeconomic activity is expected to drop and/or the trend rate of productivity growth is small, a rise in firing costs affects mainly (and adversely) the hiring decision and not the layoff decision. This makes firing costs harmful to employment when it may appear most appropriate. In contrast, firing costs can raise employment during periods of high growth and poistive shocks. Our hypothesis is supported by empirical results using OECD data.

Suggested Citation

  • Chen, Yu-Fu & Snower, Dennis J. & Zoega, Gylfi, 2002. "Labour Market Institutions and Macroeconomic Shocks," CEPR Discussion Papers 3480, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3480
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    References listed on IDEAS

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    Cited by:

    1. H Buscher & C Dreger & R Ramos & J Surinach, 2009. "The Impact of Institutions on the Employment Performance in European Labour Markets," Economic Issues Journal Articles, Economic Issues, vol. 14(1), pages 17-34, March.
    2. Dai, Min & Keppo, Jussi & Maull, Tim, 2015. "Hiring, firing, and relocation under employment protection," Journal of Economic Dynamics and Control, Elsevier, vol. 56(C), pages 55-81.
    3. Diaz-Vazquez, Pilar & Snower, Dennis J., 2003. "On-the-Job Training, Firing Costs and Employment," IZA Discussion Papers 910, Institute for the Study of Labor (IZA).
    4. Gustavo Canavire-Bacarreza & Fernando Rios-Avila, 2015. "On the Determinants of Changes in Wage Inequality in Bolivia," Economics Working Paper Archive wp_835, Levy Economics Institute.
    5. Bjørnstad, Roger & Kalstad, Kjartan Øren, 2010. "Increased price markup from union coordination: OECD panel evidence," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-37.
    6. Martin Heipertz & Melanie Ward-Warmedinger, 2008. "Economic and Social Models in Europe and the Importance of Reform," Financial Theory and Practice, Institute of Public Finance, vol. 32(3), pages 255-287.
    7. Yu-Fu Chen & Gylfi Zoega, 2011. "Floating Exchange Rates as Employment Protection," DEGIT Conference Papers c016_038, DEGIT, Dynamics, Economic Growth, and International Trade.
    8. Henin, Pierre-Yves & Weitzenblum, Thomas, 2005. "Employment protection and the stock market: the common shock case," Economic Modelling, Elsevier, vol. 22(1), pages 127-146, January.
    9. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo Group Munich.
    10. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non- Wage Labour Costs," Dundee Discussion Papers in Economics 154, Economic Studies, University of Dundee.
    11. Robert Krol & Shirley Svorny, 2007. "Unions and Employment Growth: Evidence from State Economic Recoveries," Journal of Labor Research, Springer, vol. 28(3), pages 525-535, July.
    12. Kim, Jaewon, 2011. "Why do Some Studies Show that Generous Unemployment Benefits Increase Unemployment Rates? A Meta-Analysis of Cross-Country Studies," Research Papers in Economics 2011:18, Stockholm University, Department of Economics.

    More about this item

    Keywords

    firing costs; hiring and firing; real options; stochastic demand;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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