Threshold Effects of Dismissal Protection Regulations and Employment Dynamics

Yu-Fu Chen and Michael Funke

No 195, Dundee Discussion Papers in Economics from Economic Studies, University of Dundee

Abstract: Labour market regulations aimed at enhancing job-security are dominant in several OECD countries. These regulations seek to reduce dismissals of workers and fluctuations in employment. The main theoretical contribution is to gauge the effects of such regulations on labour demand across establishment sizes. In order to achieve this, we investigate an optimising model of labour demand under uncertainty through the application of real option theory. The calibration results indicate that labour market rigidities may be crucial for understanding sluggishness in firms´ labour demand across plant sizes in continental Europe.

Keywords: Labour Demand; Dismissal Protection Legislation; Firing Costs; Real Options (search for similar items in EconPapers)
JEL-codes: D81 J23 J58 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2006-11
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