DP1430 Employment, Macroeconomic Fluctuations and Job Security

Author(s): María del Pilar Díaz-Vázquez, Dennis J. Snower
Publication Date: July 1996
Keyword(s): Employment, Firing and Hiring Costs, Job Security, Macroeconomic Fluctuations, Unemployment, Wage Determination
JEL(s): D8, E3, J2, J3, J6
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1430

The paper explores the influence of job security provisions on employment and unemployment. We show that this influence depends on the persistence of the macroeconomic fluctuations to which the labour market is exposed, and on employees? bargaining power in wage negotiations. Specifically, costs of firing and hiring reduce employment and stimulate unemployment when the macroeconomic fluctuations are sufficiently prolonged and employees have sufficient bargaining power; but firing and hiring costs can have the opposite effect if the fluctuations are transient and employees are weak. In this way, the paper offers an explanation for Europe?s favourable unemployment performance vis-à-vis the United States in the 1950s and 1960s (when macroeconomic fluctuations were transient and union strength was moderate), and Europe?s relatively unfavourable unemployment performance since the mid-1970s (when fluctuations were prolonged and unions were stronger).