How Do Layoff Costs Affect Employment?

Lars Ljungqvist

No 403, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: General equilibrium analyses of layoff costs have had mixed messages on the implications for employment. This paper brings out the economic forces at work and explains the disparate results. Specifically, we show that positive employment effects of layoff costs come through reducing labor reallocation, whereas negative effects come through reducing the private return to work due to those layoff costs and the associated inefficient allocation of labor. Additional adverse employment effects can arise through an increase in the effective bargaining strength of workers. These forces explain why layoff costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how layoff costs are assumed to enter the bargaining process.

Keywords: unemployment; Layoff costs (search for similar items in EconPapers)
JEL-codes: E24 J63 J68 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2001-11
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published - published in: Economic Journal, 2002, 112 (482), 829-853

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Related works:
Journal Article: How Do Lay--off Costs Affect Employment? (2002)
Working Paper: How Do Layoff Costs Affect Employment? (2001)
Working Paper: How Do Layoff Costs Affect Employment? (1999)
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