The magic of layoff taxes requires equilibrium stability

In the same vein as Blanchard and Tirole (J Eur Econ Assoc 6:45–77, 2008) First Pass, this note shows that, under the condition for equilibrium stability, the partial implementation of layoff taxes invariably increases firms’ profits as well as workers’ utilities by lowering payroll taxes. It also proves that, due to multiple equilibria, requiring stability does not raise any equilibrium existence issue per se. These insights could favor the introduction of firing taxes, which in practice would probably be a gradual process.