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The Impact of Firing Restrictions on Labor Market Equilibrium in the Presence of On-the-job Search

Listed author(s):
  • Fabien Postel-Vinay

    (Département d'économie)

  • Hélène Turon

    (Department of Economics (University of Bristol))

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, or may be induced to accept one that they would otherwise reject with a negotiated severance package. We formalise those mechanisms within an extension of the Diamond–Mortensen–Pissarides model that allows for employed job search. We find that our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment and that ignoring on-the-job Search leads one to overstate the adverse impact of firing costs on employment.

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File URL: http://spire.sciencespo.fr/hdl:/2441/5e9a6u2pke9ulafplci76jms73/resources/2014-postel-vinay-et-al-the-economic-journal.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/5e9a6u2pke9ulafplci76jms73.

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Date of creation: Mar 2014
Publication status: Published in The Economic Journal G, 2014, vol. 124, pp.31-61
Handle: RePEc:spo:wpmain:info:hdl:2441/5e9a6u2pke9ulafplci76jms73
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  1. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  2. Adriana D. Kugler & Gilles Saint-Paul, 2004. "How Do Firing Costs Affect Worker Flows in a World with Adverse Selection?," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 553-584, July.
  3. Fella, Giulio, 2007. "When do firing taxes matter?," Economics Letters, Elsevier, vol. 97(1), pages 24-31, October.
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