An essay on the generational effect of employment protection

This paper provides an explanation for the observed positive relationship between youth unemployment and the cost of firing workers. When the cost of firing workers is high, firms only fire when the present discounted value of future losses is high, in which case they gain little by postponing the firing decision in the hope that productivity will recover. The young workers are then the first to go due to their longer remaining tenure. In contrast, when the cost of firing workers is low, the present discounted value of future losses is small at the firing margin and firms may choose to wait in the hope of a recovery. In this case they may choose to fire the older workers first since the younger ones are more likely to be around when productivity recovers.Age structure Tenure Firing decisions Real options