Different Skill Levels and Firing Costs in a Matching Model with Uncertainty ? An Extension of Mortensen and Pissarides (1994)

39 Pages Posted: 16 Feb 2001  

Stephan Kohns

University of Bonn - Institute of International Economic Policy; IZA Institute of Labor Economics

Date Written: January 2000

Abstract

A matching model in the line of Mortensen and Pissarides (1994) is augmented with a low-skill labor market and firing costs. It is shown that even with flexible wages unemployment is higher among the low-skilled and increases with skill-biased technological change. The two main reasons are that their jobs have a shorter life expectancy than in the labor market for the skilled, increasing the inflow into unemployment, and that the jobs are less profitable, resulting in a smaller outflow from unemployment. Firing costs increase employment security among existing jobs, but the unskilled are likely to profit less than the skilled, and the availability of new jobs decreases in both sectors. Within the present framework the effect of firing costs on unemployment is ambiguous, but unemployment spells are shown to be longer with higher firing costs. The implications of explicitly introducing business cycles into the model are considered, too.

JEL Classification: J23, J32, J63, J64

Suggested Citation

Kohns, Stephan, Different Skill Levels and Firing Costs in a Matching Model with Uncertainty ? An Extension of Mortensen and Pissarides (1994) (January 2000). IZA Discussion Paper No. 104. Available at SSRN: https://ssrn.com/abstract=224095

Stephan Kohns (Contact Author)

IZA Institute of Labor Economics

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

University of Bonn - Institute of International Economic Policy ( email )

Lennestrasse 37
Bonn 53113
Germany
+49-228-73-9234 (Phone)

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