When Do Firing Taxes Matter?

9 Pages Posted: 20 Jan 2007

See all articles by Giulio Fella

Giulio Fella

Queen Mary, University of London

Abstract

Firing taxes are due only if a separation is labelled a layoff rather than a quit. Since it is Pareto optimal for firms and workers to label a separation a quit whenever doing so maximizes joint wealth, firing taxes have real effects only as long as layoffs are subsidized relative to quits. When firing taxes exceed the effective layoff subsidy the equilibrium coincides with the laissez-faire equilibrium in which the choice between layoff and quits is not distorted. We show that the maximum relevant size of firing taxes is small for a significant number of OECD countries. This suggests that firing taxes are an unlikely candidate to explain cross-country differences in labour market performance.

Keywords: Firing taxes, layoffs quits

JEL Classification: E24, J64, J65

Suggested Citation

Fella, Giulio, When Do Firing Taxes Matter?. Economics Letters. Available at SSRN: https://ssrn.com/abstract=957840

Giulio Fella (Contact Author)

Queen Mary, University of London ( email )

Mile End Road
London E1 4NS, London E1 4NS
United Kingdom

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