When Do Firing Taxes Matter?
9 Pages Posted: 20 Jan 2007
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: Suggested Citation