On the impact of firing costs under different wage setting regimes

•We build a model to study how employment protection interacts with wage bargaining.•Firing taxes are less harmful for job creation under centralised bargaining.•Firing transfers may be more or less harmful under centralised bargaining.•Model predictions are assessed by using data that are novel in the literature.

We build a model where firing transfers and firing taxes interact with the degree of centralisation in wage bargaining. The comparative statics of the model imply that firing taxes are less harmful for aggregate employment in economies with centralised bargaining as opposed to economies with decentralised bargaining. By contrast, firing transfers are less harmful in economies with decentralised bargaining providing outsider wages are sufficiently downward flexible. We investigate the empirical consistency of these predictions by using data that allow for a proper separation of firing taxes from firing transfers.