How do Lay‐off Costs Affect Employment?

General equilibrium analyses of layoff costs have had mixed messages on the implications employment. This paper brings out the economic forces at work and explains the results. Specifically, we show that positive employment effects of layoff costs come reducing labor reallocation, whereas negative effects come through reducing the return to work due to those layoff costs and the associated inefficient allocation of. Additional adverse employment effects can arise through an increase in the effective strength of workers. These forces explain why layoff costs tend to increase in search models while the opposite is true in models with employment lotteries. matching models, we show that the employment effects depend critically on how layoff are assumed to enter the bargaining process.