On the impact of firing costs under different wage setting regimes

Abstract

We build a model where firing transfers and firing taxes interact with the degree of centralisation in wage bargaining. The comparative statics of the model imply that firing taxes are less harmful for aggregate employment in economies with centralised bargaining as opposed to economies with decentralised bargaining. By contrast, firing transfers are less harmful in economies with decentralised bargaining providing outsider wages are sufficiently downward flexible. We investigate the empirical consistency of these predictions by using data that allow for a proper separation of firing taxes from firing transfers.