On the effectiveness of firing costs

This paper evaluates the determinants of the effectiveness of firing costs in reducing layoffs. We define effectiveness as either the level of productivity at which firms start firing workers for a given level of firing costs, or the change in this level caused by a given change in the level of firing costs. We find that both are very sensitive to the rate of interest, the persistence of productivity shocks, and the level of uncertainty. An increase in the persistence of shocks makes firing costs less effective, independent of which definition is used. A rise in the real interest rates initially makes firms start firing earlier, but then later
if interest rates rise above a certain threshold. A rise in firing costs affects the firing threshold most at high interest rates. Finally, a rise in the degree of uncertainty makes firms wait longer before firing workers, but the effectiveness of changes in firing costs is not much affected by the degree of uncertainty.