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

Universitat Pompeu Fabra Working Paper No. 447

Posted: 6 Nov 2000  

Adriana D. Kugler

McCourt School of Public Policy ; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; 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); IZA Institute of Labor Economics

Date Written: February 2000

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

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: https://ssrn.com/abstract=221008

Adriana Debora Kugler (Contact Author)

McCourt School of Public Policy ( email )

3700 O ST NW
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Washington, DC 20057
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
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United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
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Germany

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Gilles Saint-Paul

University of Toulouse I - GREMAQ-IDEI ( email )

Manufacture des Tabacs
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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

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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