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Firm Financed Training and pareto Improving Firing taxes

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This paper shows that the under-investment in firm financed training caused by hold up can justify the introduction of firing taxes in a laissez-faire economy with search frictions and risk neutral agents. More precisely we highlight two results. First, the introduction of a firing tax for newly hired workers combined with hiring subsidies, always acts as a Pareto improving policy. Second, with no hiring subsidies, the introduction of a firing tax for the newly hired always increase the welfare of employed while its impact on the welfare of unemployed depends on the returns to training. We also analyze the implications of such a policy if a minimum wage is binding for newly hired workers.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 197.

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Length: 35 pages
Date of creation: 20 Jun 2011
Date of revision: 20 Jun 2011
Handle: RePEc:rtv:ceisrp:197
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