On the effects of firing costs when investment is endogenous: An extension of a model by Bertola

Abstract

This paper analyses how job security policies, which in practice result in higher firing costs, affect employment in a model that recognizes that these policies also affect profitability and investment. The results show that the effects depend crucially on the exact assumption about goods demand. If goods demand is very elastic, firing costs have large negative effects on trend employment and investment, whereas the effects are small when demand is inelastic or not very elastic. The paper also analyses the relationship between trend employment, investment and firing costs under alternative assumptions about the substitution elasticity between labour and capital.