Job flow dynamics and firing restrictions

This paper proposes and solves a stochastic search model with endogenous job separation and shows that the amplitude and time variation of job reallocation depend crucially upon the arrival rate of exogenous firing permissions. The tighter the firing restrictions, the less volatile is job destruction and the higher the correlation between job reallocation and net employment changes. Furthermore, as firing restrictions increase, the average level of job reallocation falls while equilibrium unemployment is approximately constant. A parameterization of the model can rationalize cross-country differences in the cyclical behaviour of job creation and destruction. (C) 1998 Elsevier Science B.V. All rights reserved.