JOB FLOW DYNAMICS AND FIRING RESTRICTIONS

This paper proposes and solves a stochastic search model with endogeno us job separation and shows that the amplitude and time variation of j ob reallocation depend crucially upon the arrival rate of exogenous fi ring permissions. The tighter the firing restrictions, the less volati le is job destruction and the higher the correlation between job reall ocation and net employment changes. Furthermore, as firing restriction s increase, the average level of job reallocation falls while equilibr ium unemployment is approximately constant. A parameterization of the model can rationalize cross-country differences in the cyclical behavi our of job creation and destruction. (C) 1998 Elsevier Science B.V. Al l rights reserved.