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Departamento de Economía
Documentos de Trabajo
Dismissal Conflicts and Unemployment
José Enrique Galdón-SánchezMaia Güell
AbstractFiring costs are often blamed for unemployment. In this paper, we
investigate this widespread belief theoretically. Firing costs are
introduced in an efficiency wage model to capture their effects on
employment through wages. In addition, dismissal conflicts are modelled
explicitly and their cost is derived. These two elements are included and
linked. Modelling firing costs in a context where worker effort is not
perfectly observable implies that a double moral hazard problem could
arise. Whenever firms face a redundancy, they tend to use disciplinary
dismissals in order to avoid paying firing costs. Similarly, workers will
then tend to deny any disciplinary case to get a compensation. Our claim in
this paper is that the resolution of this problem by a third party will be
imperfect given the information problem. This implies that disciplinary
dismissals will not be costless. Firing costs in turn will have a negative
effect on aggregate employment because they modify the rent that has to be
paid to workers to prevent shirking. We also find that the solution to the
problem does not necessarily imply the elimination of firing
costs.
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