Abstract

http://ssrn.com/abstract=221008
 
 

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Hiring and Firing Costs, Adverse Selection, and Long-term Unemployment


Adriana D. Kugler


Georgetown University - Public Policy Institute (GPPI); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER)

Gilles Saint-Paul


University of Toulouse I - GREMAQ-IDEI; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

February 2000

Universitat Pompeu Fabra Working Paper No. 447

Abstract:     
In this paper, we present a matching model with adverse selection that explains why flows into and out of unemployment are much lower in Europe compared to North America, while employment-to-employment flows are similar in the two continents. In the model, firms use discretion in terms of whom to fire and, thus, low quality workers are more likely to be dismissed than high quality workers. Moreover, as hiring and firing costs increase, firms find it more costly to hire a bad worker and, thus, they prefer to hire out of the pool of employed job seekers rather than out of the pool of the unemployed, who are more likely to turn out to be "lemons". We use microdata for Spain and the U.S. and find that the job finding probability of the unemployed to the job finding probability of employed job seekers was smaller in Spain than in the U.S. Furthermore, using U.S. data, we find that the discrimination of the unemployed increased over the 1980's in those states that raised firing costs by introducing exceptions to the employment-at-will doctrine.

JEL Classification: E24, J41, J63, J64, J65, J71

working papers series


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Date posted: November 6, 2000  

Suggested Citation

Kugler, Adriana D. and Saint-Paul, Gilles, Hiring and Firing Costs, Adverse Selection, and Long-term Unemployment (February 2000). Universitat Pompeu Fabra Working Paper No. 447. Available at SSRN: http://ssrn.com/abstract=221008

Contact Information

Adriana Debora Kugler (Contact Author)
Georgetown University - Public Policy Institute (GPPI) ( email )
3600 N Street, NW Suite 200
Washington, DC 20057
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Gilles Saint-Paul
University of Toulouse I - GREMAQ-IDEI ( email )
Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France
+33 5 6112 8544 (Phone)
+33 5 6122 5563 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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