Age-Design Employment Protection

Arnaud Cheron

No 641, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: extending the theory of job creation and job destruction to account for a finite working life-time. We first argue that the potential employment gains related to employment protection is large for older workers, but higher firing taxes for these workers increase job destruction rates of younger generations. On the contrary, age-decreasing firing taxes can account for lower job destruction rates at all ages. Furthermore, from a normative standpoint, because firings of older (younger) workers exert a negative (positive) externality on the matching process, we find that the first best age-dynamics of firing taxes and hiring subsidies is typically hump-shaped. Taking into account distortions related to unemployment benefits and bargaining power shows the robustness of this result, in contradiction with what is done in most OECD countries.

Date: 2009
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