An essay on the generational effect of employment protection

Yu-Fu Chen, Gylfi Zoega

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    Abstract

    This paper provides an explanation for the observed positive relationship between youth unemployment and the cost of firing workers When the cost of firing workers is high, firms only fire when the present discounted value of future losses is high, in which case they gain little by postponing the firing decision in the hope that productivity will recover The young workers are then the first logo due to their longer remaining tenure. In contrast, when the cost of firing workers is low, the present discounted value of future losses is small at the firing margin and firms may choose to wait in the hope of a recovery. In this case they may choose to fire the older workers first since the younger ones are more likely to be around when productivity recovers. (C) 2010 Elsevier B V All rights reserved.

    Original languageEnglish
    Pages (from-to)349-359
    Number of pages11
    JournalMathematical Social Sciences
    Volume59
    Issue number3
    DOIs
    Publication statusPublished - May 2010

    Keywords

    • Age structure
    • Tenure
    • Firing decisions
    • Real options
    • AMERICAN CALL OPTIONS
    • VALUATION FORMULA
    • DIVIDENDS
    • STOCKS
    • UNEMPLOYMENT
    • CLAIMS

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