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)| false Millard, S.and D. T. Mortensen, 1994, The Unemployment and Welfare Effects of Labour Market Policy: a Comparison of the U.S. and the U.K., in: D.J. Snowerand G. de la Dehesa, eds., Unemployment Policy: How Government Should Respond to Unemployment?, ( Cambridge University Press, Cambridge).
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I have benefited from extensive comments and suggestions by Giuseppe Bertola in the preparation of this paper. Long conversations with Giovanni Dell’ Ariccia helped me to solve several problems. I also benefited from the comments of Luis Cubeddu, Chris Pissarides, Eswar Prasad, and seminar participants at the IMF, at the 1998 meeting of the North American Econometric Society, and at the 1998 meeting of the Society for Economic Dynamic and Control. The first draft of this paper was prepared before the author joined the Fund, and it will be reviewed by an outside journal.
Millard and Mortensen (1997) study the effect of traditional fixed firing costs rules on aggregate flows, whereas Garibaldi (1998a) analyses the effect of firing restrictions on the dynamics of job creation and destruction. In the U.S. data compiled by Davis and Haltiwanger (1990,1992) job destruction appears much more volatile than job creation, and job reallocation, the sum of job creation and destruction, moves counter-cyclically. In continental Europe, conversely, job creation and destruction moves in a opposite but symmetric way. Garibaldi (1998a) shows that firing permissions reduce the volatility of job destruction, and cause job reallocation to be uncorrelated with net employment changes.
Formally, worker turnover reads
where H and S are total hirings and total separations.
If two countries have similar WT, and, from footnote 4 UE, NE and EU are larger in a one country, then uniformity of WT implies that EE and EN must be larger in the other country.
For the United States there is ample evidence that notified workers experience shorter unemployment spells. Even though in the United States there is no legislated mandatory notice, approximately 15 percent of the layoffs workers receive layoff notification. See Addison and Blackburn (1997), and references therein.
Scandinavian countries, not analyzed in this papers, lie somewhat between the two extreme of the scale.
Equation (2) implicitly assumes that there is no on-the-job search by workers employed in good job. As we will show below, this is true in equilibrium.
From the worker’s standpoint, the (positive) surplus from being employed in a bad is
which is positive as long as
A viable labor market requires that Wg > 0, and in what follows, we assume that
The effect of advance notice on the match surplus is similar to the effect of firing costs on natural turnover, as it is illustrated in the model of Saint-Paul (1995), where firms use quits as a way to reach costless workers reductions.
Differentiating Wg with respect to τ*, for a given value of θ, yields
In this section, as in the rest of the paper, we assume that business conditions are perfectly known to the firm and the worker, and we rule out any signaling problem associated with mandatory notice. Kuhn (1992) solves a partial equilibrium model in which business conditions are not perfectly known to the worker, and mandatory notice act as a signaling device.
An alternative policy of issuing notice at interval lower than τ* is obviously sub-optimal, since it would increase the cost and it would reduce the benefit.
Garibaldi (1998b) studies the possibility of multiple equilibria in a dynamic version of the model presented in this paper.
Job creation in the simulation is simply
Unemployment inflows are equal to unemployment outflows and read
Finally, quits are given by