How Do Layoffs Costs Affect Employment?

36 Pages Posted: 27 Nov 2001

See all articles by Lars Ljungqvist

Lars Ljungqvist

Stockholm School of Economics - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: November 2001

Abstract

General equilibrium analysis of layoff costs have had mixed messages on the implications for employment. This Paper brings out the economic forces at work and explains the disparate results. Specifically, we show that positive employment effects of layoff costs come through reducing labor reallocation, whereas negative effects come through reducing the private return to work due to those layoff costs and the associated inefficient allocation of labor. Additional adverse employment effects can arise through an increase in the effective bargaining strength of workers. These forces explain why layoff costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how layoff costs are assumed to enter the bargaining process.

Keywords: Layoff costs, unemployment

JEL Classification: E24, J63, J68

Suggested Citation

Ljungquist, Lars, How Do Layoffs Costs Affect Employment? (November 2001). Available at SSRN: https://ssrn.com/abstract=291880

Lars Ljungquist (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
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S-113 83 Stockholm
Sweden
+46 8 736 9209 (Phone)
+46 8 313 207 (Fax)

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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