The Aggregate Implications of Reducing Firing Costs in the Short and Long Run

To assess the impacts of reducing government-mandated firing costs in the short and long run on unemployment, I develop a general equilibrium heterogeneous firm model with search frictions, hours adjustment, and firing costs. In the model calibrated to U.S. job flows, I find that unemployment and average unemployment spells are increasing in the level of per unit firing costs. Therefore, reforms that reduce these costs will decrease unemployment in the long run. The economy transitions to the new long run quickly, with the transition dynamics characterized by a steep drop in unemployment in the first few months after reform