Petrongolo, Barbara: Firing Cost and Stigma: A Theoretical Analysis and Empirical Evidence on Micro Data
World Conference Econometric Society, 2000, Seattle

Patrizia Canziani, J. P. Morgan Securities Ltd.
Barbara Petrongolo, Universidad Carlos III de Madrid and CEPR
Firing Cost and Stigma: A Theoretical Analysis and Empirical Evidence on Micro Data
Session: C-10-25  Tuesday 15 August 2000  by Petrongolo, Barbara
This paper uses a general equilibrium search model to study the effects of firing costs in the presence of imperfect information about workers' ability. Firing costs change the way firms form expectations about workers' abilities from their employment history. The model exhibits the standard implication that firing costs lower the option value of hiring workers of uncertain productivity, thus youth unemployment is higher. More importantly, firing costs increase the stigma associated with a bad employment history which may lead to higher long-term unemployment. Using micro data on labor market transitions, we test and confirm the model's prediction that firing costs increase the stigma of poor employment histories.
Submitted paper full-text in .pdf


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