Adjustment costs, uncertainty and employment inertia

Serie: Documentos de Trabajo. 9620.

Autor: Una-Louise Bell.

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Adjustment costs, uncertainty and employment inertia (3 MB)

Resumen

Excessive levels of firing costs have been consistently blamed for the relatively weak employment performance in Europe, yet the conclusions to be drawn from the literature are somewhat ambiguous. This paper re-examines the impact of adjustment costs under uncertainty. It is shown that the interaction between the level of adjustment costs and the type of uncertainty can have important ramifications for employment dynamics. More specifically. we find that allowing for the possibility of transitory economic conditions results in a considerable increase in employment persistence. We conclude the analysis with a number of simulation exercises to illustrate that allowing for changes in the economic environment in which firms have operated over the past two decades can considerably enhance our understanding of the evolution of employment within Europe.