Transitions into Unemployment and the Nature of Firing Costs

Review of Economic Dynamics, 2003, vol. 6, issue 3, 651-671

Abstract: We study the effects of firing taxes on labor market outcomes. These taxes, more common in European markets, include all administrative and procedural costs incurred by the firm. As such, they are independent of the dismissed worker's skill level. We establish that, for young workers, unemployment incidence increases with skill in high-firing-tax countries, while the opposite holds in economies with low firing taxes. The model is able to replicate these observations, while maintaining unemployment duration and the unemployment rate as decreasing functions of skill in all countries. Because of constant firing taxes, the effective tax rate diminishes with skill. Hence, the size of job destruction costs decreases with skill. Also, high-skill vacancies are more profitable, implying tighter markets. These two reasons generate the skill-incidence pattern. (Copyright: Elsevier)

Keywords: Matching models; Firing costs; Unemployment; Job tenure; Wage profile (search for similar items in EconPapers)
JEL-codes: E24 J41 J63 J64 J65 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (23)

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DOI: 10.1016/S1094-2025(03)00018-8

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