Employment Protection and Unemployment in an Efficiency Wage Model

Princeton University IRS Working Paper No. 432

21 Pages Posted: 25 Apr 2000

See all articles by Maia Güell

Maia Güell

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: March 2000

Abstract

Firing costs are often blamed for unemployment. This paper investigates this widespread belief theoretically. The main points are two. First, firing costs are introduced in an efficiency wage model to capture their effects on employment though wages. Second, dismissal conflicts are modeled explicitly and their cost is derived. These two elements are put together and linked. In this way, the model integrates very different views put forward by different economists depending on the model used: the view that firing costs reduce employment, the idea that firing costs are neutral on employment if markets are perfect and complete, and also the possibility that firing costs are chosen voluntarily by firms. Modeling 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 compensation. My claim in this paper is that the resolution of this problem by a third party will be imperfect given the information problem. This will in turn imply that disciplinary dismissals will not be costless, and therefore firing costs will have a negative effect on aggregate employment. Some policy implications are discussed. In particular, it is found that the solution to the problem does not necessarily imply the elimination of firing costs.

JEL Classification: J32, J38, J65

Suggested Citation

Guell, Maia, Employment Protection and Unemployment in an Efficiency Wage Model (March 2000). Princeton University IRS Working Paper No. 432. Available at SSRN: https://ssrn.com/abstract=223737 or http://dx.doi.org/10.2139/ssrn.223737

Maia Guell (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2717 (Phone)
+34 94 816 9721 (Fax)

HOME PAGE: http://www.econ.upf.es/~mguell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

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