Unions, Firing Costs, and Unemployment

• Published in: Labour (Rome, Italy) Vol. 22; no. 3; pp. 509 - 546
• Main Author: Modesto, Leonor
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01-09-2008
• Subjects: Age; Cost analysis; Costs; Dismissal; Dismissals; Effects; Firings; Labor Market; Labor unions; Labour market structure; Overlapping-generations model; Productivity; Studies; Trade unionism; Unemployment; Unions; Wage levels; Wages; Wages & salaries; Workers; Youth Employment
• ISSN: 1121-7081; 1467-9914
• DOI: 10.1111/j.1467-9914.2008.00424.x

.  We study the effects of firing costs in unionized economies with heterogeneous workers. We consider an overlapping generations model where workers participate in the labour market both when young and when old. All workers belong to the same union that sets wages unilaterally. We find that at given wages firing costs increase youth unemployment and decrease old‐age unemployment. However, once the wage response is considered, firing costs increase both youth and old‐age unemployment. Indeed, knowing that when firing costs are higher firms refrain from firing, the union increases the wage of old workers, and, therefore, old‐age unemployment increases.