Job creation and investment in imperfect financial and labor markets

Purpose This paper aims to weigh the restrictions to job creation imposed by labor market imperfections with respect to financial market imperfections. The authors want to see which restriction is more severe, and thus assess which is more powerful in creating permanent employment if it were removed. Design/methodology/approach A structural estimation is performed. The policy rules of the dynamic programming model are integrated into a simulated maximum likelihood procedure by which the model parameters are recovered. Data come from the CBBE (Balance Sheet data from the Bank of Spain). Identification of key parameters comes mainly from the observation of debt variation and sluggish adjustment to permanent labor. Findings Long-run permanent employment increases up to 69% when financial constraints are removed, whereas permanent employment only increases up to 54% when employment protection or firing costs are eliminated. The main finding of this paper is that the long-run expansion of permanent employment is larger when financial imperfections are removed than when firing costs are removed, even when there are important wage increases that moderate these employment expansions. Social implications The removal of firing costs has been suggested by several economists as a result of the analysis of labor market imperfections. These policies, however, face the strong opposition of labor unions. This paper shows that the goals of permanent job creation can be accomplished without removing employment protection but by means of enhancing financial access to firms. Originality/value The connection between financial constraints and employment has been studied in recent years, motivated by the Great Recession. However, there is no assessment of how financial and labor market imperfections compare with each other to restrict permanent job creation. This comparison is crucial for policy analysis. This study is an attempt to fill out this gap in the economic literature. No previous research has attempted to perform this very important comparison.

Firing Costs and Job Loss: The Case of the Italian Jobs Act

A recent reform in the Italian labour market has modified the permanent contract by reducing firing costs. Using a discontinuity in the application of the reform, we evaluate its effect on the probability of being still employed about three and a half years later. In contrast with theoretical predictions, we find that the job survival probability is not smaller for the treated and even significantly larger in some cases. We investigate the composition of permanent workers hired after the reform and we find evidence of treated firms changing their recruitment strategy in favour of potentially more productive workers.

Unemployment

This chapter offers a wide-ranging review of the macroeconomics of unemployment and related issues. Setting the scene with definitions, motivation, and facts, the discussion proceeds to a baseline wage and price setting model, which offers some first key insights. Formal models of trade unions and efficiency wages, and of the less standard, but topical, dual labour markets, are developed next. Dynamic issues, such as hysteresis and its underpinning factors, are also discussed. A major subsequent theme is the flows and search-based recent theory, emphasizing job creation and destruction, hiring and firing costs, and the Beveridge Curve. Additionally, the effects of technical progress on unemployment, wage inequality, and job polarization are discussed. The chapter concludes with a review of the high European unemployment of the 1980s and 1990s and the ‘shocks versus institutions’ debates on its causes.

How Large Are Firing Costs? A Cross-Country Study

This paper provides evidence for the size and the cyclicality of firing costs for the United States and Germany. In contrast to the existing literature, we use the optimality conditions obtained in a search and matching model to find a reduced form equation for firing costs. We find that our estimates are slightly larger compared with other studies and document sizable time-variation in firing costs.

El impacto de los costes de despido sobre el empleo en España: Una estimación con datos de panel

This paper examines the effect of firing costs on the Spanish employment. On the basis of a theoretical model with two periods of time and firing costs, a regional dynamic panel data is estimated for the period 2005-2011. According to this model, two opposite effects take place: on the one hand, the presence of firing cost makes the employer more careful to hire new workers in the first period; but, on the other hand, the firing penalty makes the firm more reluctant to reduce employment in period 2. Then, the global effect of mandatory firing costs remains unclear. The main result obtained in our estimations is that higher firing costs would negatively affect employment in the short run, but in the long run this effect vanishes.

Employment protection legislation, labor courts, and effective firing costs

In many countries, labor courts play a central role in the determination of firing costs by monitoring and supervising the procedures for dismissals, and, eventually, deciding severance payments mandated by the employment protection legislation (EPL). To get some insights about the impact of labor courts on effective firing costs, we explore a new database that contains information on labor courts’ intervention in firings before and after the implementation of significant EPL reforms modifying severance payments and procedures for dismissals. Our results suggest that labor court rulings on economic dismissals did not fully translate the reduction of firing costs mandated by the new EPL to effective firing costs.