INCENTIVES AND THE COST OF FIRING IN AN EQUILIBRIUM LABOR MARKET MODEL WITH ENDOGENOUS LAYOFFS*

I study the effects of firing costs in an equilibrium model of the labor market with moral hazard. Layoff is an incentive device, modeled as termination of the optimal long‐term contract. When the economy’s stock of firms is fixed, firing costs could reduce layoffs and increase worker welfare. In the long run when firms are free to enter and exit the market, firing costs generate not only lower employment, longer unemployment durations, and lower aggregate output, but also lower welfare for both employed workers and new labor market entrants.     

Institutions and training inequality

We analyze how firm-provided training is affected by the interaction among important institutional variables in the labor market: firing costs, minimum wages and unemployment benefits. We find that the degree of complementarity and substitutability among these variables depends on employees' abilities. Thereby the institutional interactions influence skill inequality. We derive how the influence of one of the institutional variables above is affected by other institutional variables with respect to inequality in skills arising from firm-provided training. We derive several striking results, such as: (a) the minimum wage and unemployment benefits generate increasing skill inequality whereas firing costs generate skill equalization; (b) unemployment benefits and firing costs are complements in their effects on skill inequality, (c) firing costs and the minimum wage are substitutes in their effects on skill equalization, and (d) unemployment benefits and the minimum wage are substitutes in their effects on skill inequality.     

Wage Cyclicality and Composition Bias in the Norwegian Economy*

Using employer–employee register data, I estimate the real wage semi-elasticity of aggregate unemployment for the years 1997–2014 in the Norwegian private sector. An increase of 1 percentage point in aggregate unemployment is associated with an average decrease of 2 percent in (total) daily wages. Although Norway has influential labor market institutions, wages in the Norwegian private sector are quite sensitive to business-cycle fluctuations. Gender differences in wage cyclicality and compositional variation are considerable. Men have significantly more procyclical wages than women, and appear more likely to upgrade procyclically to better-paying firms.     

Labor market structure and offshoring

We consider a two‐country, two‐sector model in which a firm’s offshoring decision depends on labor market rigidities that impose additional costs on the firm. Firms endogenously choose their organizational form considering their productivity level and organizational costs. The costs generated by labor market frictions play a key role in determining the benefits of each organizational structure, and thus helps determine the conditions under which a firm decides to offshore. There are three different types of equilibria depending on the relative levels of the domestic and foreign labor market costs and the price of the intermediate input. In all equilibria, a relative rise in the domestic labor market cost increases the share of firms that offshore, while decreasing domestic integration. Furthermore, an economy with offshoring has a higher welfare level and a lower unemployment rate than it would under autarky.     

Worker heterogeneity and labor market volatility in matching models

Shimer demonstrated that aggregate productivity shocks in a standard matching model cause fluctuations in key labor market statistics—such as the job-finding rate, the vacancy/unemployment ratio, and the unemployment rate—that are too small by an order of magnitude [Shimer, R., 2005. The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (1) 25–49]. This paper shows that when the standard model is extended to allow for worker heterogeneity, it exhibits considerably greater volatility. In the model, marginal workers, whose productivity only slightly exceeds the value of their alternative use of time, constitute a disproportionate share of unemployment on average, and that share rises when aggregate conditions deteriorate. These composition effects cause firms to open fewer vacancies during downturns.     

Are judges biased by labor market conditions?

When a firing litigation is taken to court, only the characteristics of the employee's misconduct should be relevant for the judge's decision. Using detailed data from an Italian bank and aggregate macro data, this paper shows that, instead, local labor market conditions influence the court's decision: The same misconduct episode may be considered sufficient for firing in a tight labor market but insufficient otherwise. We reach this conclusion after taking carefully into consideration the non-random selection of firing litigations for trial. Although these results refer to the specific situation considered, they raise more general issues. For macroeconomists they suggest that higher unemployment rates may increase firing costs via the effect on courts’ decision criteria; thus, the real extent of firing rigidities cannot be assessed without considering the role of courts. For labor law scholars, these findings are important because, following traditional principles, the law should be applied in the same way for all citizens and over the entire national territory.     

The labor market effects of introducing unemployment benefits in an economy with high informality

Unemployment benefit systems are nonexistent in many developing economies. Introducing such systems poses many challenges which are partly due to the high level of informality in the labor markets of these economies. This paper studies the consequences on the labor market of implementing an unemployment benefit system in economies with large informal sectors and high flows of workers between formality and informality. We build a search and matching model with endogenous destruction, on-the-job search, and intersectoral flows, where agents in the economy decide optimally whether or not to formalize jobs. We calibrate the model for Mexico, and show that the introduction of an unemployment benefit system, where workers contribute when employed in the formal market and collect benefits when they lose their jobs, even if they obtain informal jobs, can lead to an increase in formality in the economy, while also producing small increases in unemployment. The exact impact of incorporating such benefits depends on the relative strength of two opposing effects: the generosity of the benefits and the level of the contributions that finance those benefits. We also show important policy complementarities with other interventions in the labor market. In particular, combining the unemployment benefit program with policies that reduce the cost of formality, such as lower employment taxes and firing costs, can produce greater decreases in informality and lower impacts on unemployment than when the program is applied in isolation.     

Subsidy competition and imperfect labor markets

This study presents a two‐country model of subsidy competition for manufacturing firms under labor market imperfections. Because subsidies affect the distribution of firms, subsidies influence unemployment rates and welfare in both countries. We show that when labor market frictions are high, subsidy competition is beneficial, although subsidies under subsidy competition are inefficiently high. In the coordinated equilibrium, the supranational authority provides a subsidy to firms that equal the expected total search costs, which increases the number of firms relative to laissez‐faire and improves welfare relative to laissez‐faire and subsidy competition. Finally, we find that a rise in a country's labor market frictions raises the equilibrium subsidy rate, affects unemployment rates, and lowers welfare.     

Working capital requirement and the unemployment volatility puzzle

Shimer (2005) argues that a search and matching model of the labor market in which wage is determined by Nash bargaining cannot generate the observed volatility in unemployment and vacancy in response to reasonable labor productivity shocks. This paper examines how incorporating monopolistically competitive firms with a working capital requirement (in which firms borrow funds to pay their wage bills) improves the ability of the search models to match the empirical fluctuations in unemployment and vacancy without resorting to an alternative wage setting mechanism. The monetary authority follows an interest rate rule in the model. A positive labor productivity shock lowers the real marginal cost of production and lowers inflation. In response to the fall in price level, the monetary authority reduces the nominal interest rate. A lower interest rate reduces the cost of financing and partially offsets the increase in labor cost from a higher productivity. A reduced labor cost implies the firms retain a greater portion of the gain from a productivity shock, which gives them a greater incentive to create vacancies. Simulations show that a working capital requirement does indeed improve the ability of the search models to generate fluctuations in key labor market variables to better match the U.S. data.     

Wage bargaining and turnover costs with heterogenous labor and perfect history screening

We study effects of mobility costs in a model of (Nash) wage bargaining between workers and firms, with instantaneous matching, heterogeneous workers, identical firms and free firm entry, and where firms can screen workers perfectly according to their previous work history but not their actual productivity. We derive the employment level and the minimum worker quality standard, in the market solution, and in the efficient solution established by a social planner. When workers have positive bargaining power, there is always some inefficient unemployment among desired workers in the market solution. The lowest hiring standard chosen by firms is higher than the planner's standard when firing costs are high relative to hiring costs, but may be lower in the opposite case. We show that any higher established hiring standard corresponds to a market equilibrium. The model explains a tendency for a high initial unemployment rate to remain high, particularly for low-skilled workers.     

Entry costs and labor market dynamics

We study the cyclical dynamics of the value of a vacant position in labor markets characterized by search and matching frictions. We present a model of aggregate fluctuations in which firms face sunk costs to enter the production process. Our specification of sunk costs gives rise to a countercyclical value of a vacancy. We find that this overlooked object has important quantitative implications for the study of labor markets and business cycles. It affects the cyclical dynamics of the surplus division between workers and firms, and provides a better characterization of the movements in income shares over recessions and expansions. Understanding movements in the value of a vacant position helps to link the dynamics of income shares with recent volatility puzzles found in models of search and matching in labor markets.     

Separation costs, job heterogeneity and labor market volatility in the matching model

This paper extends the standard matching model by introducing a gap in separation costs between entrant and incumbent workers. We show that when this gap is omitted from the model, these costs do not improve the labor market volatility without introducing unrealistic unemployment responses to unemployment benefits.     

Employment cycles, low income work and the dynamic impact of wage regulations. A macro perspective

In this paper we investigate, against the background of Goodwin??s (1967) growth cycle model, a dual labor market economy and the consequences of introducing an unemployment benefit system and minimum wages in the second labor market and a maximum wage barrier in the first one. In the framework with free ??hiring?? and firing?? in the both labor markets we show (a) that in fact maximum real wages in the first labor market not only reduce the volatility of this labor market, but also provide global stability to the system dynamics if they are locally explosive, and (b) that larger fluctuations in employment can be made (at least partially) socially acceptable through a (workfare oriented) unemployment benefit system augmented by minimum wage in the low income segment of the labor market.     

MARKET POWER AND EFFICIENCY IN A SEARCH MODEL*

We build a theoretical model to study the welfare effects and policy implications of firms’ market power in a frictional labor market. The main characteristics of our environment are that wages play a role in allocating labor across firms and the number of agents is finite. The decentralized equilibrium is inefficient and the firms’ market power results in the misallocation of workers from the high to the low productivity firms. A minimum wage exacerbates the inefficiencies by forcing the low‐productivity firms to increase their wage. Moderate unemployment benefits can increase welfare by improving the workers’ outside option.     

Technology–Policy Interaction in Frictional Labour-Markets

Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labour-market regulations (unemployment benefits, payroll taxes, and firing costs) exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labour-market experience relative to that of the U.S.: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share. A calibrated version of our model suggests that this technology–policy interaction could explain a sizeable fraction of the observed differences between the U.S. and Europe.     

Unemployment and the Rental Rate of Capital

This paper introduces a standard neoclassical production function in an equilibrium search model of the labour market, in order to analyse the effects that changes in the (exogenous) rental rate of capital have on the unemployment rate. When the number of firms is kept fixed, an increase in the rental rate affects unemployment only through its impact on selectivity, with the direction of the change depending on the size of the worker's unemployment benefits relative to the firm's search costs. Regardless of the behaviour of selectivity, when the number of firms is determined endogenously, an increase in the rental rate always increases unemployment through a process of job destruction.     

Job creation and job destruction in the presence of informal markets

In developing economies, the fraction of informal workers can be as high as 70% of total employment. For economies with significant informal sectors, business cycle fluctuations and labor market policy interventions can have important effects not only on the unemployment rate, but also on the allocation of workers across regulated and unregulated jobs. In this paper, using worker flows data from Brazil, we build, calibrate, and simulate a two-sector search and matching labor market model, in which firms have the choice of hiring workers formally or informally. We show that our model can explain well the main cyclical patterns that lead to those cyclical reallocations. We also show how the effect of government interventions in the labor market depend on the magnitude of the reallocation of labor across regulated and unregulated sectors. For our calibration, policies that decrease the cost of formal jobs, or increase the cost of informality, raise the share of formal employment while reducing unemployment.     

Changes in cyclical patterns of the USA labor market: from the perspective of nonlinear Okun’s law

The validity of Okun’s law has been debated because of the increase in cyclicality in aggregate hours after 1985. To investigate this, I measure Okun’s coefficients in three phases of the business cycle – recession, early, and late expansions. I found that an increased coefficient for aggregate hours is due to the increased responsiveness of the employment rate during late expansions and to the increased responsiveness of hours per employee during early expansions. These findings question the flexible labor market hypothesis focusing on firms’ firing behaviors during recessions. Rather, working hours’ flexibility represents a more prominent feature of the post-1985 USA labor market.     

就业保护与劳动力市场绩效——基于跨国面板数据的实证分析

本文采用世界经济自由度指数和世界银行的世界发展指标,选取2002-2008年面板数据对就业保护的理论假说和经验分析进行了相应的验证。实证结果表明,就业保护提高了失业率,女性和青年受就业保护制度的影响程度更大;就业保护子指标对失业率的影响与理论估计一致,但显著性较低。其中,雇佣/解雇管制越低,失业率越低;法定解雇成本越高,失业率越低;服兵役时间越长,失业率越高;最低工资、集体协商、工时管制与失业率之间没有显著关系。就业保护问题的研究有助于改进我国的劳动立法,改善女性、青年的就业机会,提高就业率,发挥法律的增进市场效率的作用,为完善劳动力市场的运行机制提供理论支持。     

Search frictions and labor market participation

Cross-country differences in labor market participation are often larger than differences in unemployment rates. The same holds true across demographic groups within a given economy. We argue that the interaction between labor force participation decisions and labor market frictions can help us understand these patterns. This interaction highlights dynamic aspects of the participation decision, in contrast to standard textbook treatments that emphasize static costs and benefits of participation. We extend the standard labor market search problem to allow for a third state—non-participation—and assumes that stochastic participation costs precipitate flows into and out of non-participation. We fully characterize the worker's decision problem and use numerical simulations to demonstrate how participation patterns vary with individual characteristics and with labor market conditions.