Resource title

How Do Layoff Costs Affect Employment?

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Resource description

General equilibrium analyses of layoff costs have had mixed messages on the implications for employment. This paper brings out the economic forces at work and explains the disparate results. Specifically, we show that positive employment effects of layoff costs come through reducing labor reallocation, whereas negative effects come through reducing the private return to work due to those layoff costs and the associated inefficient allocation of labor. Additional adverse employment effects can arise through an increase in the effective bargaining strength of workers. These forces explain why layoff costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how layoff costs are assumed to enter the bargaining process.

Resource author

Lars Ljungqvist

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/21263

Resource license

Adapt according to the presented license agreement and reference the original author.