Employment, Macroeconomic Fluctuations and Job Security. Employment, Macroeconomic Fluctuations and Job Security

M. Pilar Diaz and Dennis Snower

Archive Discussion Papers from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: The paper explores the influence of job security provisions on employment and unemployment. We show that this influence depends on the persistence of macroeconomic fluctuations to which the labor market is exposed, and on employees' bargaining power in wage negotiations. Specifically, costs of firing and hiring reduce employment and stimulate unemployment when the macroeconomic fluctuations are sufficiently prolonged and employees have sufficient bargaining power; but firing and hiring costs can have the opposite effect if the fluctuations are transient and employees are weak. In this way, the paper offers an explanation for Europe's favorable unemployment performance vis-a-vis the US in the 1950s and 60s (when macroeconomic fluctuations were transient and unions strength was moderate) and Europe's relatively unfavorable performance since the mid-70s (when the fluctuations were prolonged and unions were stronger).

Date: 1996
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