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This paper provides a rationale for employment protection based on the interaction between the firm's decision on firing and the wage bargaining process with its workers. The authors develop a matching and intrafirm bargaining model where large firms hire workers on a frictional labor market and decide to destroy low productivity job worker matches. The coexistence of entry and exit worker flows gives rise to a specific interaction between the firing decision and the wage bargaining process. This interaction causes inefficient decisions for hiring and firing and numerical simulations show that a combination of firing taxes and severance payments leads to an efficient labor market.
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