Dundee Discussion Papers in Economics 096: Firing the old or the young: a non-perpetual real options analysis

We model a firm’s choice as to the age composition of dismissed workers for different assumptions about the level of firing costs. We find that with high firing costs (not to mention rising ones), firms will be inclined to fire younger workers while with low costs of firing, the older workers are at risk. Since with high firing costs old workers are better protected against layoffs, an ageing population has the effect of making employment-protection legislation more stringent.