Working Paper: CEPR ID: DP3051
Authors: Lars Ljungqvist
Abstract: General equilibrium analysis of layoff costs have had mixed messages on the implications for employment. This Paper brings out the economic forces at work and explains the disparate results. Specifically, we show that positive employment effects of layoff costs come through reducing labour reallocation, whereas negative effects come through reducing the private return to work due to those layoff costs and the associated inefficient allocation of labour. Additional adverse employment effects can arise through an increase in the effective bargaining strength of workers. These forces explain why layoff costs tend to increase employment in search models while the opposite is true in models with employment lotteries. In matching models, we show that the employment effects depend critically on how layoff costs are assumed to enter the bargaining process.
Keywords: layoff costs; unemployment
JEL Codes: E24; J63; J68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| layoff costs (J63) | decreased employment (J63) |
| layoff costs (J63) | increased bargaining strength of workers (J52) |
| increased bargaining strength of workers (J52) | higher unemployment (J64) |
| layoff costs (J63) | lower frictional unemployment (J64) |
| lower frictional unemployment (J64) | increase employment (J68) |