Abstract
This paper examines how labour turnover costs affect average labour demand when troughs are more persistent than booms. We show that the effect of firing costs on average labour demand is more expansionary (or less contractionary): the greater is the difference between the persistence of troughs and the persistence of booms, and the more prolonged are the macroeconomic shocks. This analysis may shed some light on the expected effect of a reduction of firing costs when an economy is suffering more prolonged recessions (relative to booms): average labour demand will be lower.
Highlights
Politicians and journalists often attribute the high unemployment in many European countries to their stringent job security legislation, and to their state-mandated firing costs
We examine how the effect of turnover costs on labour demand depends on the persistence of macroeconomic fluctuations
We focus on how average labour demand responds to turnover costs when the macroeconomic conditions change)
Summary
Politicians and journalists often attribute the high unemployment in many European countries to their stringent job security legislation, and to their state-mandated firing costs. We can show that the frequency of troughs relative to booms may increase due to a proportional increase in the persistence of both booms and troughs: it is clear that if the economy is in troughs a greater number of periods, a proportional increase in the duration of both booms and recessions will increase the frequency of recessions and reduce the frequency of booms In this context of asymmetric fluctuations, we examine how the effect of turnover costs on average employment depends on the characteristics of the firms’ production functions (in this respect, we extend the results of Bertola [9] to a stochastic framework).
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