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Labour Adjustment: Disentangling Firing and Mobility Costs

  • Guiso, Luigi
  • Pistaferri, Luigi
  • Schivardi, Fabiano

This paper studies the costs of adjusting employment, distinguishing between firms' firing and workers' mobility costs. We construct a simple dynamic general equilibrium model of labour demand and supply and show that only the joint response of employment and wages to firm level shocks can discriminate between the two types of costs. We use matched employer-employees data for Italy to estimate the model and find that both types of costs are present, that they are sizeable (in the range of 19,000 euros in total) and that firing costs account for almost 90 percent of total adjustment costs.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5787.

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Date of creation: Aug 2006
Date of revision:
Handle: RePEc:cpr:ceprdp:5787
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  1. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
  2. Oivind A. Nilsen & Kjell G. Salvanes & Fabio Schiantarelli, 2003. "Employment Changes, the Structure of Adjustment Costs, and Plant Size," Boston College Working Papers in Economics 586, Boston College Department of Economics.
  3. Russel W. Cooper & John C. Haltiwanger & Jonathan Willis, 2004. "Dynamics of Labor Demand: Evidence from Plant-level Observations and Aggregate Implications," NBER Working Papers 10297, National Bureau of Economic Research, Inc.
  4. Belzil, Christian, 2000. "Job Creation and Job Destruction, Worker Reallocation, and Wages," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 183-203, April.
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  6. Garibaldi, Pietro & Pacelli, Lia & Borgarello, Andrea, 2003. "Employment Protection Legislation and the Size of Firms," IZA Discussion Papers 787, Institute for the Study of Labor (IZA).
  7. Topel, Robert H, 1986. "Local Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S111-43, June.
  8. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
  9. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
  10. Donghoon Lee & Kenneth I. Wolpin, 2006. "Intersectoral Labor Mobility and the Growth of the Service Sector," Econometrica, Econometric Society, vol. 74(1), pages 1-46, 01.
  11. Moshe Buchinsky & Denis Fougère & Francis Kramarz & Rusty Tchernis, 2008. "Interfirm Mobility, Wages, and the Returns to Seniority and Experience in the U.S," Caepr Working Papers 2008-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  12. Heckman, James J, 1990. "Varieties of Selection Bias," American Economic Review, American Economic Association, vol. 80(2), pages 313-18, May.
  13. Garibaldi, Pietro & Violante, Giovanni L, 2004. "The Employment Effects of Severance Payments with Wage Rigidities," CEPR Discussion Papers 4608, C.E.P.R. Discussion Papers.
  14. John M. Abowd & Francis Kramarz, 1997. "The Costs of Hiring and Separations," NBER Working Papers 6110, National Bureau of Economic Research, Inc.
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  16. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc.
  17. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 43-61.
  18. José Varejão & Pedro Portugal, 2007. "Employment Dynamics and the Structure of Labor Adjustment Costs," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 137-165.
  19. Hamermesh, Daniel S. & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  20. repec:inr:wpaper:155908 is not listed on IDEAS
  21. Luigi Guiso & Fabiano Schivardi, 2007. "Spillovers in Industrial Districts," Economic Journal, Royal Economic Society, vol. 117(516), pages 68-93, 01.
  22. Schivardi, Fabiano & Torrini, Roberto, 2005. "Identifying the Effects of Firing Restrictions Through Size-Contingent Differences in Regulation," CEPR Discussion Papers 5303, C.E.P.R. Discussion Papers.
  23. Alonso-Borrego, Cesar, 1998. "Demand for labour inputs and adjustment costs: evidence from Spanish manufacturing firms," Labour Economics, Elsevier, vol. 5(4), pages 475-497, December.
  24. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, June.
  25. Stephen G. Bronars & Melissa Famulari, 2001. "Shareholder Wealth and Wages: Evidence for White-Collar Workers," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 328-354, April.
  26. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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