Age-Dependent Employment Protection

This paper examines the age-related design of firing taxes by extending the theory of job creation and job destruction to account for a finite working life-time. We first argue that the potential employment gains related to employment protection are high for older workers, as they are magnified by the proximity to retirement. But higher firing taxes for these workers increase job destruction rates for the younger generations. Furthermore, from a normative standpoint, when firms cannot ex-ante age-direct their search, the impact of each generation of unemployed workers on the average return on vacancies makes the internalization of the search costs for the other generations imperfect through the ex-post Nash bargaining process. We show that the first best age-profile of firing taxes is typically hump-shaped, partially in contradiction with existing policies in some European countries. Taking into account the fact that the human capital of older workers is more specific than general tends to exacerbate these results.