How Do Lay-off Costs Affect Employment?

General equilibrium analyses of lay-off costs have had mixed messages on the implications for employment. This paper brings out the economic forces at work and sheds light on the disparate results. We explain why lay-off costs tend to increase employment in search models while the opposite is true i...

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Bibliographic Details
Published inThe Economic journal (London) Vol. 112; no. 482; pp. 829 - 853
Main Author Ljungqvist, Lars
Format Journal Article
LanguageEnglish
Published Oxford, UK Blackwell Publishers 01.10.2002
Oxford University Press
Subjects
Bargaining
Cost efficiency
Economic costs
Economic models
Economic theory
Economics
Employment
General economic equilibrium
Job hunting
Labour market
Layoffs
Lotteries
Productivity
Studies
Surplus
Taxes
Unemployment
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Summary:General equilibrium analyses of lay-off costs have had mixed messages on the implications for employment. This paper brings out the economic forces at work and sheds light on the disparate results. We explain why lay-off costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how lay-off costs are assumed to enter the bargaining process.
Bibliography:ArticleID:ECOJ074
istex:BB6049EDED9C7CF91C44F02A2F260F087F8D6324
I have benefited from comments in seminars at MacMaster University, the Federal Reserve Bank of Chicago, the Summer Workshop in Macroeconomics at Northwestern University, the European University Institute, the Chinese University of Hong Kong, University College London and Tinbergen Institute, and I would especially like to thank Fernando Alvarez, Ed Prescott, Nancy Stokey, two anonymous referees and the editor, Costas Meghir. Tatiana Damjanovic provided excellent research assistance.
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ISSN:0013-0133
1468-0297
1468-0297
DOI:10.1111/1468-0297.00074