Different Skill Levels and Firing Costs in a Matching Model with Uncertainty - An Extension of Mortensen and Pissarides (1994)
A matching model in the line of Mortensen and Pissarides (1994) is augmented with a low- skill labor market and firing costs. It is shown that even with flexible wages unemployment is higher among the low-skilled and increases with skill-biased technological change. The two main reasons are that their jobs have a shorter life expectancy than in the labor market for the skilled, increasing the inflow into unemployment, and that the jobs are less profitable, resulting in a smaller outflow from unemployment. Firing costs increase employment security among existing jobs, but the unskilled are likely to profit less than the skilled, and the availability of new jobs decreases in both sectors. Within the present framework the effect of firing costs on unemployment is ambiguous, but unemployment spells are shown to be longer with higher firing costs. The implications of explicitly introducing business cycles into the model are considered, too.
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References listed on IDEAS
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- Mortensen, Dale & Pissarides, Christopher, 2011.
"Job Creation and Job Destruction in the Theory of Unemployment,"
Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
- Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 397-415.
- Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
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- Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
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- Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, vol. 36(5), pages 1013-1047, June.
- Huizinga, F & Schiantarelli, Fabio, 1992. "Dynamics and Asymmetric Adjustment in Insider-Outsider Models," Economic Journal, Royal Economic Society, vol. 102(415), pages 1451-1466, November.
- Huizinga, F. & Schiantarelli, F., 1992. "Dynamics and Asymetric Adjustment in Insider-Outsider Models," Working Papers 92-12, C.V. Starr Center for Applied Economics, New York University.
- Christopher A. Pissarides, 1992. "Loss of Skill During Unemployment and the Persistence of Employment Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1371-1391. Full references (including those not matched with items on IDEAS)
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