Job flow dynamics and firing restrictions

Abstract

The purpose of this paper is to rationalize cross country differences in cyclical behaviour of job creation and destruction. In a stochastic dynamic search model with endogenous job separation it is shown that the relative volatility of job creation and destruction depends crucially upon the arrival rate of exogenous firing permissions. The tighter the firing restrictions, the less volatile is job destruction and the higher the correlation between job reallocation and net employment changes. Furthermore, as firing restrictions increase, the average level of job reallocation falls while equilibrium unemployment is approximately constant. These results are in line with the cross country evidence on job reallocation and unemployment