ON THE EFFECTS OF FIRING COSTS WHEN INVESTMENT IS ENDOGENOUS - AN EXTENSION OF A MODEL BY BERTOLA

This paper analyses how job security policies, which in practice resul t in higher firing costs, affect employment in a model that recognizes that these policies also affect profitability and investment. The res ults show that the effects depend crucially on the exact assumption ab out goods demand. If goods demand is very elastic, firing costs have l arge negative effects on trend employment and investment, whereas the effects are small when demand is inelastic or not very elastic, The pa per also analyses the relationship between trend employment, investmen t and firing costs under alternative assumptions about the substitutio n elasticity between labour and capital.