We introduce firing costs into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the ...currency board arrangement (1999–2018). We investigate the importance of such labour market frictions for cyclical fluctuations in Bulgaria. Firing costs decrease employment volatility and pro-cyclicality, where both effects come at odds with data. Besides those, we do not find other important effects of firing costs for business cycle fluctuations in Bulgaria.
•Wrongful Discharge Laws (WLDs) increase employee firing costs.•External auditors are more likely to issue going-concern audit opinions to clients with higher firing costs.•The increased tendency is ...mainly driven by clients with high labor intensity and clients in industries with high proportions of nonunionized or full-time employees.•The increased tendency is attenuated by client importance and mainly driven by auditors with labor-specific expertise.•Our findings highlight the legislative impacts on external auditors’ reporting decision.
This paper examines the impact of employee firing costs on auditors’ going-concern (GC) reporting decisions by exploiting the wrongful discharge laws (WDLs) adopted by U.S. states. We find that auditors are more likely to issue GC opinions to financially-distressed clients headquartered in states that have adopted the laws, in particular the good faith exception, than to clients in states that have not. This finding is robust to controlling for the state-level economics, the strictness of legal liability rules, audit office fixed effects, as well as alternative definitions of financial distress and estimation methods. The impact is concentrated in labor-intensive clients and clients in industries with a higher proportion of nonunionized or permanent employees. We further find that the increased propensity to issue GC opinions is attenuated when the auditor is economically dependent on the client, and is driven by auditors who possess labor-specific expertise. Overall, these findings are consistent with higher firing costs increasing auditors’ propensity to issue GC opinions.
We examine whether labor market frictions affect firms’ tax aggressiveness. Exploiting the adoption of U.S. state-level Wrongful Discharge Laws as a quasi-exogenous shock to a firm's firing costs, we ...document a decline in tax aggressiveness for firms located in states that increase employment protection. We further show that greater employment protection increases distress risk. The decline in tax aggressiveness is more pronounced for firms that are more vulnerable to financial distress and constrained from external financial markets. Our results imply that firms avoid risky tax positions in order to mitigate increased distress risk due to more rigid labor costs.
Employee protection shocks and corporate cash holdings Beuselinck, Christof; Markarian, Garen; Verriest, Arnt
Journal of corporate finance (Amsterdam, Netherlands),
August 2021, 2021-08-00, 2021-08, Volume:
69
Journal Article
Peer reviewed
Open access
We examine the relation between employee protection legislation and corporate cash holdings. Our rationale rests on the notion that higher labor adjustment costs increase a firm's operating leverage ...making firms to adjust their liquidity management by increasing precautionary savings. Consistent with this, we show that the staggered passage of legal exceptions to the “at-will” employment doctrine in various U.S. states led to an average increase in cash holdings by 7.2%. Cash increases are higher when unionization rates and industry concentration are lower, and when industry discharge rates and volatility is higher. Consistent with the financial flexibility argument of tighter employment protection increasing corporate cash needs, the value of cash increases after the passage of pro-labor regulations. Moreover, we find that the increase in the value of cash is especially pronounced for financially constrained firms.
•We examine the relation between employee protection laws and cash holdings.•Exceptions to the “at-will” employment doctrine led to an average increase in cash holdings by 7.2%.•The largest increases in cash occur where precautionary savings are most prominent.•The value of cash holdings increases after the passage of pro-labor regulations and is largest for financially constrained firms.
Empirical studies of labor-market flows suggest cross-country differences in long-run aggregate unemployment inflows and outflows of a strikingly large magnitude. The canonical search-and-matching ...framework of Mortensen and Pissarides (1994, 1999b; the MP model) features small elasticities of steady-state unemployment flows with respect to firing costs, at odds with the idea that labor-market institutions such as employment protection policies are a primary driver of this variation. This paper shows that introducing permanent match-quality heterogeneity in the standard MP model substantially amplifies these elasticities. It then develops a quantitative search model with worker and job heterogeneity consistent with U.S. worker-flow data. This model implies that employment protection differences plausibly account for most of the long-run unemployment-flow variation across high-income countries. In sharp contrast, shutting down heterogeneity implies that large changes in matching efficiency are required to explain the same cross-country variation.
We study the impact of firing costs on aggregate total factor productivity (TFP) in a dynamic general-equilibrium framework where the evolution of establishment-level productivity is not invariant to ...the policy. Firing costs not only generate static factor misallocation, but also distort the selection of establishment’s growth by size, contributing to larger aggregate TFP losses. Numerical experiments indicate that firing costs equivalent to 5 year’s wages imply a reduction in TFP of more than 20%. Factor misallocation accounts for 20% of the productivity loss, whereas the remaining 80% arises from distorted selection in the productivity process.
Purpose
This paper aims to weigh the restrictions to job creation imposed by labor market imperfections with respect to financial market imperfections. The authors want to see which restriction is ...more severe, and thus assess which is more powerful in creating permanent employment if it were removed.
Design/methodology/approach
A structural estimation is performed. The policy rules of the dynamic programming model are integrated into a simulated maximum likelihood procedure by which the model parameters are recovered. Data come from the CBBE (Balance Sheet data from the Bank of Spain). Identification of key parameters comes mainly from the observation of debt variation and sluggish adjustment to permanent labor.
Findings
Long-run permanent employment increases up to 69% when financial constraints are removed, whereas permanent employment only increases up to 54% when employment protection or firing costs are eliminated. The main finding of this paper is that the long-run expansion of permanent employment is larger when financial imperfections are removed than when firing costs are removed, even when there are important wage increases that moderate these employment expansions.
Social implications
The removal of firing costs has been suggested by several economists as a result of the analysis of labor market imperfections. These policies, however, face the strong opposition of labor unions. This paper shows that the goals of permanent job creation can be accomplished without removing employment protection but by means of enhancing financial access to firms.
Originality/value
The connection between financial constraints and employment has been studied in recent years, motivated by the Great Recession. However, there is no assessment of how financial and labor market imperfections compare with each other to restrict permanent job creation. This comparison is crucial for policy analysis. This study is an attempt to fill out this gap in the economic literature. No previous research has attempted to perform this very important comparison.
How do firing costs affect aggregate productivity growth? To address this question, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on ...firm dynamics and on the importance of reallocation for productivity growth. In the model, growth is driven by selection among heterogeneous incumbent firms and is sustained as entrants imitate the best incumbents. In this framework, firing costs not only induce misallocation of labor, but also affect growth by affecting firms’ exit decisions. Importantly, charging firing costs only to continuing firms raises growth by promoting selection. Also charging them to exiting firms is akin to an exit tax, hampers selection, and reduces growth—by 0.1 percentage points in a calibrated version of the model. With job turnover very similar in the two settings, this implies that the treatment of exiting firms matters for growth. In addition, the impact on growth rates is larger in sectors where firms face larger idiosyncratic shocks, as in services. This fits evidence that recent EU–U.S. growth rate differences are largest in these sectors and implies that firing costs can play a role here.
Poverty Reduction and Growth Perry, Guillermo E; Lopez, J. Humberto; Maloney, William F ...
2006, 02-20-2006, 20060101
eBook, Book
Open access
That raising income levels alleviates poverty, and that economic growth can be more or less effective in doing so, is well known and has received renewed attention in the search for pro-poor growth. ...What is less well explored is the reverse channel: that poverty may, in fact, be part of the reason for a countrys poor growth performance. This more elabborated view of the development process opens the door to the existence of vicious circles in which low growth results in high poverty and high poverty in turn results in low growth. Poverty Reduction and Growth is about the existence of these vicious circles in Latin America and the Caribbean about the ways and means to convert them into virtuous circles in which poverty reduction and high growth reinforce each other. Through its analysis of fresh data and the attention it pays to issues such as the persistent inequality in the region, the role played by various microdeterminants of income, and the potential existence of human capital underinvestment traps, this title should be a valuable contribution to the current regional debate on poverty and growth, a debate that is critical to the design of policies conducive to enhancing welfare in all is dimensions among the poor of Latin America and the Caribbean.
PDF
