Endogenous labor force participation and firing costs

I construct a matching model to explain the labor market transition between employment, unemployment and nonparticipation, and evaluate the quantitative effects of firing costs. The model has several features that are distinguished from previous studies: endogenous labor force participation, different job-search decisions and imperfect insurance markets. I find that the model is able to account for the U.S. labor market, especially the gross labor-force transition rates. I also find that firing costs as a type of firing tax have a negative effect on the layoff rate, the job-finding probability and the participation rate. In particular, the effect of a decrease in the job-finding probability is greater than the effect of a decrease in the layoff rate, and this results in an increase in the unemployment-to-population ratio. Finally, firing costs make individuals' job tenures longer and skew the asset distribution to the right.

Graphical AbstractFiring costs increase the unemployment-to-population ratio and decrease the participation rate.Figure optionsDownload full-size imageDownload as PowerPoint slideResearch Highlights► I construct a matching model with employment, unemployment, and nonparticipation. ► Persons classified in a different way have different job-finding probabilities. ► I examine changes in the level of firing costs. ► Firing costs decrease the participation rate and increase the unemployment rate. ► Firing costs skew the asset distribution to the right.