Firing Costs, Employment Fluctuations and Average Employment: An Examination of Germany

Abstract

West Germany's Employment Promotion Act of 1985 facilitated the use of fixed‐term contracts and increased the number of dismissals above which the employer is required to establish a ‘social plan’ (involving severance payments). I assess the effect of this reduction in ‘firing costs’ on movements in employment, using monthly data on a panel of detailed manufacturing industries for 1977‐92. I also examine the effect of introducing flexible hours of work in certain industries beginning in 1985. I find that employment adjustment was unaffected by the lower firing costs, but slowed by the greater working hours flexibility.