Job-to-job turnover provides a way for employers to escape statutory firing costs, as unprofitable workers may willfully quit their job on receiving an outside offer, thus sparing their incumbent employer the firing costs. Furthermore, employers can induce their unprofitable workers to accept outside job offers that they would otherwise reject by offering voluntary severance packages, which are less costly than the full statutory firing cost. We formalize those mechanisms within an extension of the Diamond-Mortensen-Pissarides (DMP) matching model that allows for employed job search and negotiation over severance packages. We find that, while essentially preserving most standard qualitative predictions of the DMP model without employed job search, our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment. We further find that allowing for on-the-job search markedly changes the quantitative predictions of the DMP model regarding the impact of firing costs on unemployment and employment flows: ignoring on-the-job search leads one to strongly underestimate the negative impact of firing costs on unemployment.
|Date of creation:||Oct 2011|
|Date of revision:|
|Publication status:||published as 'The Impact of Firing Restrictions on Labour Market Equilibrium in the Presence of On-the-job Search' in: Economic Journal, 2014, 124 (575), 31-61.|
|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|
References listed on IDEAS
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.:
- Fabien Postel-Vinay & Helene Turon, 2006.
"On-the-job Search, Productivity Shocks, and the Individual Earnings Process,"
2006 Meeting Papers
5, Society for Economic Dynamics.
- Fabien Postel-Vinay & Hélène Turon, 2010. "On-The-Job Search, Productivity Shocks, And The Individual Earnings Process," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 599-629, 08.
- Postel-Vinay, Fabien & Turon, Hélène, 2006. "On-the-Job Search, Productivity Shocks and the Individual Earnings Process," IZA Discussion Papers 2006, Institute for the Study of Labor (IZA).
- Fabien Postel-Vinay & Hélène Turon, 2006. "On-the-job Search, Productivity Shocks, and the Individual Earnings Process," The Centre for Market and Public Organisation 06/141, Department of Economics, University of Bristol, UK.
- Fabien Postel-Vinay & Hélène Turon, 2005. "On-the-job Search, Productivity Shocks, and the Individual Earnings Process," PSE Working Papers halshs-00590726, HAL.
- Postel-Vinay, Fabien & Turon, Hélène, 2006. "On-The-Job Search, Productivity Shocks and the Individual Earnings Process," CEPR Discussion Papers 5593, C.E.P.R. Discussion Papers.
- Fella, Giulio, 2007. "When do firing taxes matter?," Economics Letters, Elsevier, vol. 97(1), pages 24-31, October.
- Cahuc, Pierre & Zylberberg, Andre, 1999.
"Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare,"
IZA Discussion Papers
96, Institute for the Study of Labor (IZA).
- Cahuc, Pierre & Zylberberg, André, 2000. "Redundancy payments, incomplete labor contracts, unemployment and welfare," CEPREMAP Working Papers (Couverture Orange) 0006, CEPREMAP.
- Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp6023. 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.