Labour market institutions and macroeconomic shocks

Yu-Fu Chen, Dennis Snower, Gylfi Zoega

    Research output: Contribution to journalArticle

    4 Citations (Scopus)

    Abstract

    Macroeconomic shocks and labour-market institutions jointly determine employment growth and economic performance. The effect of shocks depends on the nature of these institutions and the effect of institutional change depends on the macroeconomic environment. It follows that a given set of institutions may be appropriate in one epoch and not in another. We derive a dynamic model of labour demand in which the effect of firing costs on labour demand depends on the macroeconomic environment: When the level of macroeconomic activity is expected to drop and/or the trend rate of productivity growth is small, a rise in firing costs affects mainly (and adversely) the hiring decision and not the layoff decision. This makes firing costs harmful to employment when it may appear most appropriate. In contrast, firing costs can raise employment during periods of high growth and postive shocks. Our hypothesis is supported by empirical results using OECD data.
    Original languageEnglish
    JournalDundee Discussion Papers in Economics
    DOIs
    Publication statusPublished - 2001

    Fingerprint

    Labor market institutions
    Macroeconomic shocks
    Firing costs
    Macroeconomics
    Labour demand
    Hiring decisions
    Economic performance
    Institutional change
    Employment growth
    Empirical results
    Productivity growth

    Keywords

    • Firing costs
    • Stochastic demand
    • Hiring and firing
    • Real options

    Cite this

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    title = "Labour market institutions and macroeconomic shocks",
    abstract = "Macroeconomic shocks and labour-market institutions jointly determine employment growth and economic performance. The effect of shocks depends on the nature of these institutions and the effect of institutional change depends on the macroeconomic environment. It follows that a given set of institutions may be appropriate in one epoch and not in another. We derive a dynamic model of labour demand in which the effect of firing costs on labour demand depends on the macroeconomic environment: When the level of macroeconomic activity is expected to drop and/or the trend rate of productivity growth is small, a rise in firing costs affects mainly (and adversely) the hiring decision and not the layoff decision. This makes firing costs harmful to employment when it may appear most appropriate. In contrast, firing costs can raise employment during periods of high growth and postive shocks. Our hypothesis is supported by empirical results using OECD data.",
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    Labour market institutions and macroeconomic shocks. / Chen, Yu-Fu; Snower, Dennis; Zoega, Gylfi.

    In: Dundee Discussion Papers in Economics, 2001.

    Research output: Contribution to journalArticle

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    AU - Chen, Yu-Fu

    AU - Snower, Dennis

    AU - Zoega, Gylfi

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    AB - Macroeconomic shocks and labour-market institutions jointly determine employment growth and economic performance. The effect of shocks depends on the nature of these institutions and the effect of institutional change depends on the macroeconomic environment. It follows that a given set of institutions may be appropriate in one epoch and not in another. We derive a dynamic model of labour demand in which the effect of firing costs on labour demand depends on the macroeconomic environment: When the level of macroeconomic activity is expected to drop and/or the trend rate of productivity growth is small, a rise in firing costs affects mainly (and adversely) the hiring decision and not the layoff decision. This makes firing costs harmful to employment when it may appear most appropriate. In contrast, firing costs can raise employment during periods of high growth and postive shocks. Our hypothesis is supported by empirical results using OECD data.

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    KW - Stochastic demand

    KW - Hiring and firing

    KW - Real options

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