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On the welfare implications of firing costs

Booth, Alison L and Zoega, Gylfi (2003) 'On the welfare implications of firing costs.' European Journal of Political Economy, 19 (4). pp. 759-775. ISSN 0176-2680

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Abstract

This is a paper on the theory of institutions. It provides a rationale for the presence of firing costs in OECD countries based on a market failure that takes the form of an externality. Workers have firm-specific and industry-specific skills, and in each period there is a nonzero probability that a worker quits. The quitting probability makes the private discount rate (used by firms in making decisions about firing workers) higher than the social discount rate. This generates a “quitting externality”, where firms lay off too many workers in a recession. Firms are too quick to dispose of their human capital in a cyclical downturn because it is of less value to them than it is to society. State-mandated redundancy payments become a second-best remedy to overcome the market failure.

Item Type: Article
Uncontrolled Keywords: Quitting externalities; Human capital; Employment; Redundancy payments
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Faculty of Social Sciences > Institute for Social and Economic Research
Depositing User: Jim Jamieson
Date Deposited: 18 Jul 2012 11:33
Last Modified: 29 Jan 2014 13:04
URI: http://repository.essex.ac.uk/id/eprint/3158

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