Labour Market Institutions and Macroeconomic Shocks

Dennis Snower, Gylfi Zoega and Yu-Fu Chen

No 3480, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Macroeconomic shocks and labour-market institutions jointly determine employment growth and economic performance. The effect of shocks depends on the nature of these institutions and the effect of institutional change depends on the macroeconomic environment. It follows that a given set of institutions may be appropriate in one epoch and not in another. We derive a dynamic model of labour demand in which the effect of firing costs on labour demand depends on the macroeconomic environment: When the level of macroeconomic activity is expected to drop and/or the trend rate of productivity growth is small, a rise in firing costs affects mainly (and adversely) the hiring decision and not the layoff decision. This makes firing costs harmful to employment when it may appear most appropriate. In contrast, firing costs can raise employment during periods of high growth and poistive shocks. Our hypothesis is supported by empirical results using OECD data.

Keywords: Firing costs; Stochastic demand; Hiring and firing; Real options (search for similar items in EconPapers)
JEL-codes: E32 J23 J24 (search for similar items in EconPapers)
Date: 2002-08
New Economics Papers: this item is included in nep-lab, nep-ltv and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Labour‐market Institutions and Macroeconomic Shocks (2003)
Working Paper: Labour-Market Institutions and Macroeconomic Shocks (2002)
Working Paper: Labour Market Institutions and Macroeconomic Shocks (2001)
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