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Transitions into Unemployment and the Nature of Firing Costs

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  • Alain Delacroix

    (Purdue University)

Abstract

We study the effects of firing taxes on labor market outcomes. These taxes, more common in European markets, include all administrative and procedural costs incurred by the firm. As such, they are independent of the dismissed worker's skill level. We establish that, for young workers, unemployment incidence increases with skill in high-firing-tax countries, while the opposite holds in economies with low firing taxes. The model is able to replicate these observations, while maintaining unemployment duration and the unemployment rate as decreasing functions of skill in all countries. Because of constant firing taxes, the effective tax rate diminishes with skill. Hence, the size of job destruction costs decreases with skill. Also, high-skill vacancies are more profitable, implying tighter markets. These two reasons generate the skill-incidence pattern. (Copyright: Elsevier)

Suggested Citation

  • Alain Delacroix, 2003. "Transitions into Unemployment and the Nature of Firing Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 651-671, July.
    • Handle: RePEc:red:issued:v:6:y:2003:i:3:p:651-671
    DOI: 10.1016/S1094-2025(03)00018-8
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    Citations

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    Cited by:

    1. Vasileios Gkionakis, 2004. "Short Job Tenures and Firing Taxes in the Search Theory of Unemployment," CEP Discussion Papers dp0628, Centre for Economic Performance, LSE.
    2. Olsson, Martin, 2013. "Employment Protection and Parental Child Care," Working Paper Series 952, Research Institute of Industrial Economics.
    3. Alain Delacroix & Etienne Wasmer, 2007. "Job and Workers Flows in Europe and the US: Specific Skills or Employment Protection?," Post-Print hal-01053160, HAL.
    4. Jens Rubart, 2006. "Dismissal Protection or Wage Flexibility," Computing in Economics and Finance 2006 406, Society for Computational Economics.
    5. Alessandria, George & Delacroix, Alain, 2008. "Trade and the (dis)incentive to reform labor markets: The case of reform in the European Union," Journal of International Economics, Elsevier, vol. 75(1), pages 151-166, May.
    6. Dennis Wesselbaum, 2014. "Firing tax vs severance payments – an unequal comparison," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(5), pages 721-736, September.
    7. Gkionakis, Vasileios, 2004. "Short job tenures and firing taxes in the search theory of unemployment," LSE Research Online Documents on Economics 19964, London School of Economics and Political Science, LSE Library.
    8. Alexandron-Lavon, Anat & Epstein, Gil S. & Lindner-Pomerantz, Renana, 2018. "The effect of ideological positions on job market interaction: A spatial analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 261-274.
    9. Ahrens, Steffen & Wesselbaum, Dennis, 2009. "On the introduction of firing costs," Kiel Working Papers 1559, Kiel Institute for the World Economy (IfW Kiel).
    10. repec:spo:wpecon:info:hdl:2441/9938 is not listed on IDEAS
    11. repec:hal:spmain:info:hdl:2441/9938 is not listed on IDEAS
    12. Alexandron-Lavon, Anat & Epstein, Gil S. & Lindner Pomerantz, Renana, 2017. "The Effect of Ideological Positions on Job Market Interaction," IZA Discussion Papers 11152, Institute of Labor Economics (IZA).
    13. Alain Delacroix & Etienne Wasmer, 2007. "Job and Workers Flows in Europe and the US: Specific Skills or Employment Protection?," Post-Print hal-01053160, HAL.
    14. Ayman Mnasri & Zouhair Mrabet & Mouyad Alsamara, 2023. "A new quadratic asymmetric error correction model: does size matter?," Empirical Economics, Springer, vol. 65(1), pages 33-64, July.
    15. repec:hal:wpspec:info:hdl:2441/9938 is not listed on IDEAS
    16. Alain Delacroix, 2000. "Matching Between Heterogeneous Workers and Firms," Econometric Society World Congress 2000 Contributed Papers 1523, Econometric Society.
    17. Richard Rogerson & Robert Shimer & Randall Wright, 2004. "Search-Theoretic Models of the Labor Market-A Survey," NBER Working Papers 10655, National Bureau of Economic Research, Inc.
    18. Oskamp, Frank & Snower, Dennis J., 2006. "The effect of low-wage subsidies on skills and employment," Kiel Working Papers 1292, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    Keywords

    Matching models; Firing costs; Unemployment; Job tenure; Wage profile;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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