How do firing costs affect worker flows in a world with adverse selection?

Adriana D. Kugler, Gilles Saint-Paul

Research output: Contribution to journalArticlepeer-review

Abstract

This article provides theoretical and empirical analyses of a firing costs model with adverse selection. Our theory suggests that, as firing costs increase, firms increasingly prefer hiring employed workers, who are less likely to be lemons. Estimates of re-employment probabilities from the National Longitudinal Survey of Youth support this prediction. Unjust-dismissal provisions in U.S. states reduce the re-employment probabilities of unemployed workers relative to employed workers. Consistent with a lemons story, the relative effects of unjust-dismissal provisions on the unemployed are generally smaller for union workers and those who lost their previous jobs due to the end of a contract.

Original languageEnglish (US)
Pages (from-to)553-584
Number of pages32
JournalJournal of Labor Economics
Volume22
Issue number3
DOIs
StatePublished - Jul 2004

ASJC Scopus subject areas

  • Industrial relations
  • Economics and Econometrics

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