Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/20973
Authors: 
Saint-Paul, Gilles
Kugler, Adriana D.
Year of Publication: 
2000
Series/Report no.: 
IZA Discussion paper series 134
Abstract: 
In this paper, we present a matching model with adverse selection that explains why flows into and out of unemployment are much lower in Europe compared to North America, while employment-to-employment flows are similar in the two continents. In the model, firms use discretion in terms of whom to fire and, thus, low quality workers are more likely to be dismissed than high quality workers. Moreover, as hiring and firing costs increase, firms find it more costly to hire a bad worker and, thus, they prefer to hire out of the pool of employed job seekers rather than out of the pool of the unemployed, who are more likely to turn out to be `lemons'. We use microdata for Spain and the U.S. and find that the ratio of the job finding probability of the unemployed to the job finding probability of employed job seekers was smaller in Spain than in the U.S.. Furthermore, using U.S. data, we find that the discrimination of the unemployed increased over the 1980's in those states that raised firing costs by introducing exceptions to the employment-at-will doctrine.
Subjects: 
Adverse selection
turnover costs
unemployment
worker flows
matching models
discrimination
JEL: 
J65
E24
J71
J41
J63
J64
Document Type: 
Working Paper

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