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Quitting Externalities, Employment Cyclicality and Firing Costs

Booth, Alison L and Zoega, Gylfi (1994) Quitting Externalities, Employment Cyclicality and Firing Costs. Working Paper. C.E.P.R. Discussion Papers.

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This paper derives a model in which workers have firm-specific and industry-specific skills, and in each period there is a non-zero probability that a worker quits. This makes the private discount factor, used by firms in making decisions about hiring and training new workers and firing existing ones, higher than the social one. As a consequence, not only do firms underinvest in training but employment becomes too cyclical. 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. This provides a rationale for state-mandated redundancy payments as a second-best remedy to overcome the market failure.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Employment Cyclicality; Human Capital; Quitting Externalities; Redundancy Payments
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 18 Jul 2012 10:20
Last Modified: 18 Jul 2012 10:20

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