Unions, Firing Costs and Unemployment
In this paper we conduct an analysis of the effects of firing costs in models that consider simultaneously worker heterogeneity, imperfect information on their productivity and union power. We consider an OLG model where heterogeneous workers participate in the labour market both when young and old. Each generation of workers is represented by its own union. Unions set wages unilaterally taking into account firm behavior. Firms are atomistic and choose employment treating wages parametrically. There is imperfect information about worker productivity. We find that at given wages firing costs increase youth unemployment and decrease old age unemployment. However, once we take the wage response into account, we find that firing costs increase both youth and old age unemployment. This happens because unions react strategically, and respond to higher firing costs. Indeed, when firing costs increase, firms refrain from hiring youths since, if a young worker turns out to be inadequate, it will be more costly to fire him. The union, knowing this, reduces the wage of young workers in order to attempt to increase their employment prospects. However, despite this cut youth unemployment still increases with firing costs. In the second period, on the contrary, higher firing costs give the union more power. In fact, knowing that firms will be less likely to cut their labour force when firing costs are high, the union increases the wage of old workers, and, therefore, old age unemployment increases.
|Date of creation:||May 2004|
|Publication status:||published in: Labour, 2008, 22 (3), 509 - 546|
|Contact details of provider:|| Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany|
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
- Tito Boeri, 2004.
"The Effects of Employment Protection: Learning from Variable Enforcement,"
2004 Meeting Papers
445a, Society for Economic Dynamics.
- Boeri, Tito & Jimeno, Juan F., 2005. "The effects of employment protection: Learning from variable enforcement," European Economic Review, Elsevier, vol. 49(8), pages 2057-2077, November.
- Tito Boeri & Juan F. Jimeno, "undated". "The Effects of Employment Protection: Learning from Variable Enforcement," Working Papers 2003-12, FEDEA.
- Tito Boeri & Juan F. Jimeno, 2003. "The Effects of Employment Protection: Learning from Variable Enforcement," Working Papers 252, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Boeri, Tito & Jimeno, Juan F, 2003. "The Effects of Employment Protection: Learning from Variable Enforcement," CEPR Discussion Papers 3926, C.E.P.R. Discussion Papers.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991.
"Unemployment: Macroeconomic Performance and the Labour Market,"
Oxford University Press, number 9780198284345, December.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, December.
- Robert Gibbons & Lawrence F. Katz, 1989.
"Layoffs and Lemons,"
629, Princeton University, Department of Economics, Industrial Relations Section..
- Gibbons, Robert & Katz, Lawrence F., 1991. "Layoffs and Lemons," Scholarly Articles 3442782, Harvard University Department of Economics.
- Robert Gibbons & Lawrence Katz, 1989. "Layoffs and Lemons," NBER Working Papers 2968, National Bureau of Economic Research, Inc.
- Gibbons, R. & Katz, L.F., 1989. "Layoffs And Lemons," Working papers 531, Massachusetts Institute of Technology (MIT), Department of Economics.
- Kugler, Adriana & Saint-Paul, Gilles, 2000.
"Hiring and Firing Costs, Adverse Selection and Long-term Unemployment,"
IZA Discussion Papers
134, Institute for the Study of Labor (IZA).
- Adriana D. Kugler & Gilles Saint Paul, 2000. "Hiring and firing costs, adverse selection and long-term unemployment," Economics Working Papers 447, Department of Economics and Business, Universitat Pompeu Fabra.
- Machin, Stephen & Manning, Alan, 1999.
"The causes and consequences of longterm unemployment in Europe,"
Handbook of Labor Economics,
in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 47, pages 3085-3139
- Stephen Machin & Alan Manning, 1998. "The Causes and Consequences of Long-Term Unemployment in Europe," CEP Discussion Papers dp0400, Centre for Economic Performance, LSE.
- Stephen Machin & Alan Manning, 1998. "The causes and consequences of long-term unemployment in Europe," LSE Research Online Documents on Economics 20255, London School of Economics and Political Science, LSE Library.
- Montgomery, James D, 1999. "Adverse Selection and Employment Cycles," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 281-297, April.
- Bertola, Giuseppe & Rogerson, Richard, 1997.
"Institutions and labor reallocation,"
European Economic Review,
Elsevier, vol. 41(6), pages 1147-1171, June.
- Bertola, Giuseppe & Rogerson, Richard, 1996. "Institutions and Labour Reallocation," CEPR Discussion Papers 1519, C.E.P.R. Discussion Papers.
- Giuseppe Bertola & Richard Rogerson, 1996. "Institutions and Labor Reallocation," NBER Working Papers 5828, National Bureau of Economic Research, Inc.
- bertola, G. & Rogerson, R., 1996. "Institutions and Labor Reallocation," Papers 272, Banca Italia - Servizio di Studi.
- Modesto, Leonor & Thomas, Jonathan P., 2001.
"An analysis of labour adjustment costs in unionized economies,"
Elsevier, vol. 8(4), pages 475-501, September.
- Modesto, Leonor & Thomas, Jonathan P., 2000. "An Analysis of Labour Adjustment Costs in Unionized Economies," IZA Discussion Papers 225, Institute for the Study of Labor (IZA).
- 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 915-938, October.
- Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-595, September.
- Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp1157. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.