Labour-Market Institutions and Macroeconomic Shocks

25 Pages Posted: 21 Aug 2002

See all articles by Yu-Fu Chen

Yu-Fu Chen

University of Dundee - Department of Economic Studies

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Gylfi Zoega

University of Iceland; University of London - Birkbeck College; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2002

Abstract

Macroeconomic shocks and labour-market institutions jointly determine employment growth and economic performance. The effect of shocks depends on the nature of these institutions and the effect of institutional change depends on the macroeconomic environment. It follows that a given set of institutions may be appropriate at certain times in some countries while not appropriate elsewhere. We derive a dynamic model of labour demand in which the effect of firing costs on labour demand depends on the macroeconomic environment: When the level of macroeconomic activity is expected to drop and/or the trend rate of productivity growth is small, a rise in firing costs affects mainly (and adversely) the hiring decision and not the firing decision. This makes firing costs harmful when they may appear to be most appropriate. The intuition behind these results is quite straightforward: When managers fear that demand may fall in the future they value the right to fire workers. It follows that by making this option more costly, firing costs reduce the value of workers with adverse consequences for hiring and firing.

Keywords: Firing Costs, Stochastic Demand, Hiring and Firing, Real Options

JEL Classification: E32, J23, J24, J54

Suggested Citation

Chen, Yu-Fu and Snower, Dennis J. and Zoega, Gylfi, Labour-Market Institutions and Macroeconomic Shocks (July 2002). Available at SSRN: https://ssrn.com/abstract=323593

Yu-Fu Chen

University of Dundee - Department of Economic Studies ( email )

Dundee DD1 4HN, Scotland
United Kingdom
+44 1382 344 383 (Phone)
+44 1382 344 691 (Fax)

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW) ( email )

Duesternbrooker Weg 120
D-24118 Kiel
Germany
+49+431-8814-235 (Phone)

Institute for the Study of Labor (IZA)

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Gylfi Zoega (Contact Author)

University of Iceland ( email )

IS-101 Reykjavik
Iceland

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
88
Abstract Views
1,597
rank
237,895
PlumX Metrics