Dismissal conflicts and unemployment

Jose Galdon-Sanchez () and Maia Güell ()

No 105, Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra from Departamento de Economía - Universidad Pública de Navarra

Abstract: Firing costs are often blamed for unemployment. In this paper, we investigate this widespread belief theoretically. Firing costs are introduced in a efficiency wage model to capture their effects on employment through wages. In addition, dismissal conflicts are modelled explicitly and their cost is derived. These two elements are included and linked. Modelling firing costs in a context where worker effort is not perfectly observable implies that a double moral hazard problem could arise. Whenever firms face a redundancy, they tend to use disciplinary dismissals in order to avoid paying firing costs. Similarly, workers will then tend to deny any disciplinary case to get a party will be imperfect given the information problem. This implies that disciplinary dismissals will not be costless. Firing costs in turn will have a negative effect on aggregate employment because they modify the rent that has to be paid to workers to prevent shirking. We also find that the solution to the problem does not necessarily imply the elimination of firing costs.

Keywords: efficiency wages; employment protection legislation; disciplinary dismissals; court decisions (search for similar items in EconPapers)
JEL-codes: J41 J52 J65 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2001
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Citations: View citations in EconPapers (3)

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Journal Article: Dismissal conflicts and unemployment (2003)
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