Firing Costs and Labor Market Fluctuations: A Cross-Country Analysis

By Gonzalo Llosa, Lee Ohanian, Andrea Raffo and Richard Rogerson

We document large differences across OECD countries in fluctuations of the intensive and extensive margin of labor supply over the business cycle. Countries with larger fluctuations in employment relative to hours per worker tend to display larger fluctuations in total hours worked. These facts appear to be related to policies that impede the dismissal of workers. We then present a quantitative framework that features both margins of labor supply as well as costs to the adjustment of employment. Cross-country differences in dismissal costs can account for a large fraction of the patterns observed in the data.

Interesting analysis on a question I looked at without success in the late 1990’s, although then I focused on unionization. Nice dataset, too. Consistent hours data is difficult to obtain. The paper could, maybe, also address one puzzle I have had for a long time: why is output volatility so low in France? Given the huge labor market frictions there, it must be part of the story.

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