Endogenous Firing Costs and Labor Market Equilibrium
We explore the macroeconomic implications of the inverse relationship between firing costs and labor market tightness, evaluating its effects on labor market performance in a matching model `a la Mortensen and Pissarides (1994). Results are clear cut and generalizes our previous work. First, different configurations of the labor market structure deriving from the optimal behavior of the economic agents give rise to multiple equilibria: high average duration of unemployment will produce a labor market with low flows and wage and high strictness of employment protection. Vice versa, short duration in the unemployment status will produce high flows and wage and low level of firing costs. Furthermore, the endogeneity of firing costs and the positive externality they produce in the market is able to modify the nature of the steady state equilibrium. When the firing costs externality dominates the search costs externality, we show that the equilibrium is characterized by indeterminacy. Otherwise, when search costs are relevant, the equilibrium is a saddle point. Finally, endogenous firing costs also affect the determination of the social optimum, since it requires to internalize two kinds of externalities.
|Date of creation:||Nov 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +39 6 49766353
Fax: +39 6 4462040
Web page: http://www.dipecodir.it/
More information through EDIRC
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.:
- Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
- Siegelman, Peter & Donohue, John J, III, 1995. "The Selection of Employment Discrimination Disputes for Litigation: Using Business Cycle Effects to Test the Priest-Klein Hypothesis," The Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 427-62, June.
- Andrea Ichino & Michele Polo & Enrico Rettore, .
"Are Judges Biased by Labor Market Conditions?,"
192, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Diamond, Peter A, 1982.
"Aggregate Demand Management in Search Equilibrium,"
Journal of Political Economy,
University of Chicago Press, vol. 90(5), pages 881-94, October.
- Olivier Blanchard & Pedro Portugal, 1998.
"What Hides Behind An Unemployment Rate: Comparing Portuguese and Us Unemployment,"
w199803, Banco de Portugal, Economics and Research Department.
- Olivier Blanchard & Pedro Portugal, 1998. "What Hides Behind an Umemployment Rate: Comparing Portuguese and U.S. Unemployment," NBER Working Papers 6636, National Bureau of Economic Research, Inc.
- Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
- 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.
- Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
- Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
- Boeri, Tito & Conde-Ruiz, José Ignacio & Galasso, Vincenzo, 2003.
"Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?,"
CEPR Discussion Papers
3990, C.E.P.R. Discussion Papers.
- Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, . "Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?," Working Papers 2003-17, FEDEA.
- Tito Boeri & J.Ignacio Conde-Ruiz & Vincenzo Galasso, 2003. "Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?," Working Papers 239, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Boeri, Tito & Conde-Ruiz, J. Ignacio & Galasso, Vincenzo, 2003. "Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?," IZA Discussion Papers 834, Institute for the Study of Labor (IZA).
- Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323, March.
When requesting a correction, please mention this item's handle: RePEc:sap:wpaper:wp89. 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: (Luisa Giuriato)
If references are entirely missing, you can add them using this form.