Non-wage labour costs, policy uncertainty and labour demand - A theoretical assessment

Labour costs in various European countries have reached a record high in recent years. The topic of non-wage labour costs is therefore increasingly being discussed among and between the political parties because non-wage labour costs are likely to have major negative effects on employment. We follow the real options approach, which allows us to investigate the value to a firm of waiting to adjust labour when the firm's wage and non-wage costs are stochastic and adjustment costs are sunk. Simulation exercises show that the interaction between hiring and firing costs, non-wage labour costs and uncertainty can have important ramifications for employment dynamics.