Research: Effect of Older Worker Unemployment Protection on Employment

Faced with low employment rates for older workers, most OECD countries
have experimented with specific older worker employment protection in the
form of taxes on firing and subsidies on hiring. A paper issued by the Institute for the Study of Labor examines the age-related design of firing taxes by extending the theory of job creation and job destruction to account for a finite working life-time.

Arnaud Chéron, Jean-Olivier Hairault, and François Langot, the authors of "Age-Dependent Employment Protection," argue that the potential employment gains related to employment protection are high for older workers, but higher firing taxes for these workers increase job destruction rates for the younger generations. On the other hand, age-decreasing firing taxes can lead to lower job destruction rates at all ages. Furthermore, because firings of older (younger) workers exert a negative (positive) externality on the matching process, the authors find that the first best age-dynamic of firing taxes and hiring subsidies is typically hump-shaped. Taking into account distortions related to unemployment benefits and bargaining power shows the robustness of this result, in contradiction with the existing policies in most OECD countries.

Source: Institute for the Study of Labor Abstract (November 2008)