Dundee Discussion Papers in Economics 094: Firing costs: Eurosclerosis or Eurosuccesses

In this paper we analyse the employment implications of firing restrictions. We find that when a recession is expected and the trend rate of productivity growth is small, a rise in firing
costs affects mainly the hiring decision. Thus there is a negative effect on average employment. When, on the other hand, a boom is expected and the rate of productivity growth is large, firing costs affect mainly the firing decision. Then, as a result, average employment is increased. Our analysis suggests that while firing restrictions might have stimulated employment and reduced unemployment in Europe in the first two decades following World War II¾when large supply shocks were absent and the average rate of growth was high¾these same restrictions may have had the opposite effects in the 1970s and 1980s, when significant negative supply shocks occurred.