Hiring and Firing Costs, Adverse Selection and Long-term Unemployment

Adriana Kugler and Gilles Saint-Paul

No 134, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In this paper, we present a matching model with adverse selection that explains why flows into and out of unemployment are much lower in Europe compared to North America, while employment-to-employment flows are similar in the two continents. In the model, firms use discretion in terms of whom to fire and, thus, low quality workers are more likely to be dismissed than high quality workers. Moreover, as hiring and firing costs increase, firms find it more costly to hire a bad worker and, thus, they prefer to hire out of the pool of employed job seekers rather than out of the pool of the unemployed, who are more likely to turn out to be `lemons’. We use microdata for Spain and the U.S. and find that the ratio of the job finding probability of the unemployed to the job finding probability of employed job seekers was smaller in Spain than in the U.S.. Furthermore, using U.S. data, we find that the discrimination of the unemployed increased over the 1980’s in those states that raised firing costs by introducing exceptions to the employment-at-will doctrine.

Keywords: matching models; worker flows; unemployment; turnover costs; Adverse selection; discrimination (search for similar items in EconPapers)
JEL-codes: E24 J41 J63 J64 J65 J71 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2000-03
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Published - published in: Journal of Labor Economics, 2004, 22(3), 553-584.

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Working Paper: Hiring and firing costs, adverse selection and long-term unemployment (2000)
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