Quitting Externalities, Employment Cyclicality and Firing Costs

Alison Booth and Gylfi Zoega

No 1101, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Employment Cyclicality; Human Capital; Quitting Externalities; Redundancy Payments (search for similar items in EconPapers)
JEL-codes: E32 J23 J24 J41 (search for similar items in EconPapers)
Date: 1994-12
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Citations: View citations in EconPapers (4)

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