DP5787 Labour Adjustment: Disentangling Firing and Mobility Costs

Author(s): Luigi Guiso , Luigi Pistaferri , Fabiano Schivardi

Publication Date: August 2006

Keyword(s): adjustment costs , mobility costs , matched employer-employees data

JEL(s): C33 , D21 , J63

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5787.asp.asp

This paper studies the costs of adjusting employment, distinguishing between firms' firing and workers' mobility costs. We construct a simple dynamic general equilibrium model of labour demand and supply and show that only the joint response of employment and wages to firm level shocks can discriminate between the two types of costs. We use matched employer-employees data for Italy to estimate the model and find that both types of costs are present, that they are sizeable (in the range of 19,000 euros in total) and that firing costs account for almost 90 percent of total adjustment costs.