Employers' hiring practices,employment protection,and costly search: A vacancy-level analysis

An employer with a vacancy may respond to high search costs by lowering hiring requirements. While such an adjustment increases the employer's chances of filling the vacancy, it also more likely results in a match that terminates when the match is hit by match-specific productivity shocks. Drawing on a novel Slovenian vacancy dataset, we find that employers who are searching to fill temporary positions are more likely to hire underqualified workers when search costs are high. We find that search costs are taken into consideration when employers are searching to fill permanent positions in some specifications but not all. These findings suggest that for employers who are searching to fill a permanent position, the benefits of lowering hiring requirements when search costs are high are likely outweighed by: a) high firing costs if an under-qualified worker is hired on a permanent contract or b) the costs of undertaking a new search later if an under-qualified worker is hired on a temporary contract. These are novel findings about the employers' hiring practices in the presence of employment protection laws and costly search.     

The shape of hiring and separation costs in France

In this article, we estimate the structure of costs of hiring, terminating, and retiring employees in France. We use a representative panel data set of French establishments that contains direct measures of these various costs as well as measures of entries and exits for the years 1992 and 1996.First, we show that our panel data source is able to reproduce results obtained by Abowd and Kramarz (2003) when we use the cross-section dimension. Our estimates show that collective terminations are much more expensive than individual terminations: legislation, namely the requirement to set up a “social plan” in case of collective terminations, magnifies firing costs. Collective terminations entail very large fixed costs. Termination costs are essentially linear in the number of terminated workers, with collective terminations being much more expensive. The costs of retirement are concave in the number of retired workers with a fixed cost component which is smaller than the one estimated for terminations, and quite smaller than that obtained by Abowd and Kramarz (2003). Finally, we find that hiring costs are small and seem only present when hiring on CDI; costs of hiring on short-term contracts are almost zero. Finally, the fixed (firm-specific) component of hiring costs is very small.     

Does employment protection help immigrants? Evidence from European labor markets

High levels of employment protection reduce hiring and firing and have a theoretically ambiguous effect on the employment level. Immigrants, being new to the labor market, may be less aware of employment protection regulations and less likely to claim their rights, which may create a gap between the costs for employers of hiring a native relative to hiring an immigrant. This paper tests that hypothesis drawing on evidence for the EU and on two natural experiments for Spain and Italy. The results suggest that strict employment protection legislation (EPL) gives immigrants a comparative advantage relative to natives. Stricter EPL is found to reduce employment and reduce hiring and firing rates for natives. By contrast, stricter EPL has a much smaller effect on immigrants.     

Technology catching-up and regulation in European regions

This paper analyses the effects of the intensity of regulations in the product and labour markets on the growth of total factor productivity (TFP) for 121 European regions. A technological catch-up model is estimated for the period 1995–2007. We use the spatial lag of X (SLX) model to capture possible spatial interactions across spatial units. Our empirical findings show that lower levels of regulation are associated with higher TFP growth. Lower barriers to entrepreneurship and lower bureaucratic costs have a positive effect on productivity growth. Corruption raises operational costs, distorts the allocation of resources and negatively affects innovation activities, thereby reducing TFP growth. Further liberalization in the labour market (in terms of hiring and firing regulation, working hours regulation and employment protection legislation) has a significant positive effect on the growth of TFP. In addition, both regional technological and regional human capital have a positive impact on the TFP growth in European regional economies.     

Trade liberalization,labor reforms and formal–informal employment dynamics

This paper studies gross worker flows to explain the rise in informality in Brazilian metropolitan labor markets from 1983 to 2002. In particular, we examine the impact of trade and constitutional reforms (that include increased firing costs, tighter restrictions on overtime work, and fewer restrictions on union activity) occurring during the period. We find aggregate sectoral movements to be driven largely by changes in the hiring rates which, in turn are driven largely by the constitutional reforms. Trade liberalization accounts for roughly 1–2.5% of the increase in informality, while the constitutional reforms account for 30–40%.     

Statutory firing costs and lay-offs in Canada

Firing costs may deter firms from engaging in both lay-offs and temporary hiring. While the net response of average employment to firing costs is ambiguous, lay-offs will be reduced through both channels and their frequency therefore will unambiguously decline. This paper estimates the effect of Canadian advance notice and severance laws on individual permanent lay-off hazards. Individual notice laws are found to reduce the lay-off hazard, particularly among non-professional, non-union workers, but the effect is small. Neither group notice nor severance laws are statistically significant. These laws do not appear to substantially affect adjustment in the Canadian labour market.     

Intersectoral labour reallocations and unemployment in Italy

The Italian labour market, like most European labour markets and unlike the US, shows a greater cyclical sensitivity of the service sector with respect to manufacturing and firing costs higher than hiring costs. This accounts for the negative relationship between sectoral employment shifts and Italian unemployment in the post-war period and, correspondingly, for the pro-cyclical pattern of the Lilien index, in contrast with the US experience.By applying the Lilien index to the Italian context, this paper analyses the relative importance of sectoral regional and national factors in the explanation of changes in industrial structure, and their impact on unemployment. The econometric exercise illustrates that, given the structural features of the Italian labour market, the decline in intersectoral and interregional labour reallocations has significantly contributed to the increase of unemployment in Italy. New hires, the pull of new sectors, sectoral shifts and regional mobility can keep unemployment down, while at the same time maintaining some of the structural features of the “European model” (high employment security and stability).     

Labor's liquidity service and firing costs

This paper studies the specific effect that firing costs can have on firms facing liquidity constraints. When firing costs are zero and a time gap exists between production and its associated revenues, firing allows firms to hold on to their liquid assets by saving on wages, and thus, allows firms to cope better with liquidity shocks when external financing is too costly or unavailable. I refer to this feature as labor's liquidity service. Higher firing costs reduces the value of labor's liquidity service, and thus, increases firms' incentive for hoarding liquidity and reduces firms' demand for production inputs. In addition to this negative effect at the creation margin of production, firing costs have a relatively higher positive effect on the destruction margin of production of financially restricted firms. This paper presents a model that develops these ideas and shows that the presence of firing costs has a stronger negative effect on the output of firms facing liquidity constraints. Regression analysis, based on country-industry panel data sets, provides empirical evidence consistent with the liquidity service effect of firing costs. I find a relatively stronger negative effect of firing costs on the output of industries with higher liquidity requirements and a relatively stronger negative effect of firing costs on the output of small, and more likely financially constrained, firms.     

Quit behavior and the role of job protection

Job protection reduces job turnover by changing firms' hiring and firing decisions. Yet the effect of job protection on workers' quit decisions and post-quit outcomes is still unknown. We present the first evidence using individual panel data from 12 European countries, which differ both in worker turnover rates and in the level of job protection. We find that workers are less likely to quit their job in countries with more job protection, and those workers who quit receive higher wages compared to stayers. This evidence can be explained by increased mobility costs associated with higher expected risk of post-quit layoff and job mismatch.     

On firm-level,industry-level,and aggregate employment fluctuations

Employment fluctuations are examined, at different levels of aggregation, in a model with firm-specific hiring decisions due to search frictions and sticky pricing. The results indicate that firm-level employment dispersion rises with higher price stickiness and higher demand elasticity, whereas it falls with more convexity of search costs and with a higher labor supply elasticity. Industry-level employment is more volatile and less procyclical than aggregate employment, and a larger industry size reduces volatility and raises co-movement with output. The calibrated model is able to match the volatility, autocorrelation and cyclical correlation of US industry-level employment when incorporating firm-specific technology shocks.     

Endogenous labor force participation and firing costs

I construct a matching model to explain the labor market transition between employment, unemployment and nonparticipation, and evaluate the quantitative effects of firing costs. The model has several features that are distinguished from previous studies: endogenous labor force participation, different job-search decisions and imperfect insurance markets. I find that the model is able to account for the U.S. labor market, especially the gross labor-force transition rates. I also find that firing costs as a type of firing tax have a negative effect on the layoff rate, the job-finding probability and the participation rate. In particular, the effect of a decrease in the job-finding probability is greater than the effect of a decrease in the layoff rate, and this results in an increase in the unemployment-to-population ratio. Finally, firing costs make individuals' job tenures longer and skew the asset distribution to the right.     

Effects of residential relocation on household and commuting expenditures in Shanghai, China

Over the past three decades, China's cities have undergone massive spatial restructuring in the wake of market reforms and economic growth. One consequence has been a rapid migration of urban residents to the periphery. Some movers have been forced out either by rising urban rents or government reclamation of their residences. Others have relocated willingly to modernized housing or for other lifestyle reasons. This article examines the effects of relocation to the urban edge on household well-being. It explores the factors underlying changes in housing and transportation costs as households move to the periphery. The research also examines whether those who moved involuntarily are affected differently from those who moved by choice. Results show that, relative to those who moved by choice, involuntary movers are disproportionately and adversely affected in terms of job accessibility, commute time, housing consumption and disposable income. The findings also show that, compared with higher-income households, lower-income groups are disproportionately affected in relation to housing costs, accessibility losses, disposable income and household worker composition. These results indicate that relocation compensation for involuntarily relocated households should be expanded to include more than just housing value: it should encompass urban location changes, household needs and relocation costs.     

Testing a model of intraurban firm relocation

A neoclassical model of firm behavior, analogous to Muth's household analysis, in a monocentric urban environment yields comparative static predictions concerning radial direction of relocation. Knowledge of plant production and demand conditions and economic characteristics of the urban environment is needed to make relocation predictions. Expected and unexpected relations between the technology, economic environment, and comparative static results on input demands and location are derived. A small, detailed data set from Cincinnati is used to test a probit model of the relocation decision. The results are consistent with theoretical expectations. Demand changes, initial plant size, and the relative magnitude of transport costs are the most important determinants of the propensity to decentralize. Traditional measures of agglomeration economies lack explanatory power.     

Do Employers Respond to the Costs of Continued Search?*

An analysis of US and Slovenian vacancy data sets reveals that an employer who is searching to fill a job vacancy is more likely to fill the vacancy by hiring an under‐qualified worker when the search costs are higher; when, at the start of the search, the employer has less time to search at low cost; and during the week following an increase in search costs. These are interesting findings not only about the effects of search costs on employers’ hiring decisions, but also because they suggest that search frictions in the two labour markets may be considerable.     

Niche firms,mass markets,and income across countries: Accounting for the impact of entry costs

I develop a model of monopolistic competition in which I distinguish between niche markets and mass markets, in the spirit of Holmes and Stevens, 2014. Firms choose between entering a small niche market with high markups or a large mass market with low markups. Entry costs and other distortions have a much greater impact on output in the niche market as the gains to specialization are high, relative to the mass market where varieties are highly substitutable. Calibrated to match data from U.S. manufacturing, the model generates an elasticity of total factor productivity with respect to entry costs almost twice that in a model that abstracts from heterogeneous markets. I use data on entry costs across countries to show entry costs alone can account for 23 percent of the cross-country variation in income per worker.     

On the effectiveness of firing costs

This paper evaluates the determinants of the effectiveness of firing costs in reducing layoffs. We define effectiveness as either the level of productivity at which firms start firing workers for a given level of firing costs, or the change in this level caused by a given change in the level of firing costs. We find that both are very sensitive to the rate of interest, the persistence of productivity shocks, and the level of uncertainty. An increase in the persistence of shocks makes firing costs less effective, independent of which definition is used. A rise in the real interest rates initially makes firms start firing earlier, but then later if interest rates rise above a certain threshold. A rise in firing costs affects the firing threshold most at high interest rates. Finally, a rise in the degree of uncertainty makes firms wait longer before firing workers, but the effectiveness of changes in firing costs is not much affected by the degree of uncertainty.     

Distance,trade and FDI: a Hausman–Taylor SUR approach

This paper analyses the effects of distance as a common determinant of exports and FDI in a three‐factor New Trade Theory model, assuming that distance affects both pure trade costs and plant set‐up costs. Exports and FDI are not necessarily substitutes with respect to distance, since the predicted impact depends on its importance for fixed plant set‐up costs relative to transportation costs and on the relative importance of vertical MNEs. For the empirical specification, we suggest that the impact of time‐invariant variables such as distance is most appropriately analysed in a Hausman–Taylor SUR model. We apply our model to industry‐level data of bilateral outward FDI stocks and exports of the US and Germany. Copyright © 2004 John Wiley & Sons, Ltd.     

The effect of lot-sizing on workload variability

Lot-sizing models which group demand requirements for one or more consecutive time periods into a single production run have received considerable attention in recent years. Material Requirements Planning (MRP) systems must, for instance, make a lot-size decision for each planned order release. Existing decision models attempt to minimize the sum of setup plus inventory holding costs. However, lot-sizing tends to increase the work center load variability, and, consequently, the costs associated with changing production levels from period to period should be incorporated into the economic analysis. This study is concerned, first of all, with analytically describing the relationship between dynamic lot-sizing models and workload variability. Secondly, in order to account for production level change costs we propose a simple modification to existing heuristic models. Lastly, we employ a simulation model to empirically extend these results to a typical MRP multiechelon production environment. An example is included to show clearly that with cost premiums for overtime and severance or guaranteed minimum costs for undertime the traditional lot-sizing techniques significantly underestimate actual costs and can lead to very costly policies.Mean, variance and coefficient of variation of period work time requirements are derived as a function of several algorithm characteristics. Average cycle time (number of periods covered by a single batch) is found to be the most influential factor in determining workload variability. Variance grows approximately in proportion to this cycle time with the proportionality constant being the square of average period workload. Cycle time and demand variability also contribute to workload variability. Results indicate that for a given average cycle time, the EOQ method will minimize workload variability. When N products utilize the same work center, the coefficient of load variation will be reduced by a factor of N^{?$\text{1}\text{2}$} unless requirements are positively correlated. Positive correlation would result when products have similar seasons or parent items. In this case grouping such products cannot help reduce variability.In order to incorporate production level change costs into existing heuristics we may simply introduce a term consisting of a penalty factor times average cycle time. The penalty factor represents the costs of period by period production level changes. Several popular heuristics are extended in this fashion, and it is found that solutions are still readily obtainable, requiring only modifications to setup or holding cost parameters.The effects of level change costs are examined via simulation for a specific yet typical environment. It is found that when setup costs are significant, traditional lot-sizing heuristics can provide cost savings and service level improvements as compared to lot-for-lot production. However, whereas for our model the obtainable profit improvement from lot-sizing was 25% in the case of freely variable capacity, actual improvements were only one half as large when reasonable hiring and firing practices and overtime and undertime costs were considered. Consequently, management needs to consider carefully labor costs and work center product relationships when determining a production scheduling method.