DP1519 Institutions and Labour Reallocation

Author(s): Giuseppe Bertola, Richard Rogerson
Publication Date: November 1996
Keyword(s): Firing Costs, Gross Job Turnover, Wage Compression
JEL(s): J31, J63
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1519

Despite stringent dismissal restrictions in most European countries, rates of job creation and destruction are remarkably similar across European and North American labour markets. This paper shows that relative-wage compression is conducive to higher employer-initiated job turnover, and argues that wage-setting institutions and job security provisions differ across countries in ways that are both consistent with rough uniformity of job turnover statistics and readily explained by intuitive theoretical considerations. When viewed as a component of the mix of institutional differences in Europe and North America, European dismissal restrictions are essential to a proper interpretation of both similar patterns in job turnover, and marked differences in unemployment flows.