Firing costs are often blamed for unemployment. This paper investigates this widespread
belief theoretically. The main points are two. First, firing costs are introduced in an effi-
ciency wage model to capture their effects on employment though wages Second, dismissal
conflicts are modeled explicitly and their cost is derived. These two elements are put together
and linked. In this way, the model integrates very different views put forward by different
economists depending on the model used: the view that firing costs reduce employment,
the idea that firing costs are neutral on employment if markets are perfect and complete
and, also the possibility that firing costs are chosen voluntarily by firms. Modeling 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. My claim in this paper is that the resolution
of this problem by a third party will be imperfect given the information problem. This will
in turn imply that disciplinary dismissals will not be costless and therefore firing costs will
have a negative effect on aggregate employment. Some policy implications are discussed.
In particular, it is found that the solution to the problem does not necessarily imply the
elimination of firing costs.

This paper studies the effects of the introduction of fixed-term contracts in Spain on the duration distribution of unemployment, with particular emphasis on the changes in duration
dependence. Since the introduction of fixed-term contracts in the mid 1980s, the Spanish labor market has become more dynamic in terms of inflows and outflows from unemployment to employment. I estimate a parametric duration model using cross-sectional data drawn from the Spanish Labor Force Survey from 1980 to 1994, which allows me to analyze the chances of leaving unemployment before and after the introduction of fixed-term contracts. I find evidence that for very short durations, of up to five months, the probability of leaving unemployment has increased since the introduction of fixed-term contracts. But the reverse is true for longer durations. Also, the chances of finding a job are significantly higher for those workers who became unemployed because their fixed-term contract came to an end than for
those who lost their job for other reasons. In addition, there is less duration dependence for
those who lost their job due to the expiration of a fixed-term contract than for those who lost their job for other reasons.

In this paper we analyze court outcomes of dismissal conflicts for several countries. We
highlight two facts. First, the patterns found are extremely stable in every country over
time. Second, two types of patterns are found: either the workers win most of the cases, or
the worker and the firm win half the times each. We build a model of dismissal conflicts that
explains these facts. The gap between the severance pay for fair and unfair dismissals is a
key factor in the determination of such court outcomes. Those countries with a small gap
have outcomes in which the workers win most of the time, and the average cost of firing is
higher than in those countries with a smaller gap. This suggests that costly dismissals and
rigid employment protection legislation are not necessarily synonymous.

During the 1980s, many European countries introduced fixed-term contracts to fight high
and persistent levels of unemployment. Although these contracts have been widely used,
unemployment remains about the same after fifteen years. This paper builds a theoretical
model to reconcile these facts. I analyze the labor market effect of the introduction of
fixed-term contracts in an efficiency wage model. The form of incentive compatible fixed-
term contracts and the firm’s choice of contracts are studied. Permanent contracts are the
standard way to offer incentives, but fixed-term contracts are cheaper. This generates an
externality, which can make employment higher in the system with only permanent contracts.
As a consequence, from a social point of view, the share of fixed-term contracts is too large.
Increases in the renewal rate of fixed-term contracts into permanent contracts lead to higher
employment levels. The model highlights the interaction between different rigidities in the
labor market. Aggregate employment and the share of temporary contracts are affected in
the same way by firing costs and the flexibility of wages.

We propose a new econometric estimation method for analyzing the probability of leaving unemployment
using uncompleted spells from repeated cross-section data, which can be especially
useful when panel data are not available. The proposed method-of-moments-based estimator
has two important features: (1) it estimates the exit probability at the individual level and (2)
it does not rely on the stationarity assumption of the inflow composition. We illustrate and
gauge the performance of the proposed estimator using the Spanish Labor Force Survey data,
and analyze the changes in distribution of unemployment between the 1980s and 1990s during
a period of labor market reform. We find that the relative probability of leaving unemployment
of the short-term unemployed versus the long-term unemployed becomes significantly higher in
the 1990s.