Marinescu, Ioana Elena
(2007)
The economics of unfair dismissal in the United Kingdom, and other topics in public policy.
PhD thesis, London School of Economics and Political Science.
Abstract
Workers and firms face substantial uncertainties about their prospects in the labor and product markets. The first three chapters of this thesis analyze how firing costs affect firms' behavior and workers' outcomes in the face of uncertainty about match quality and changing economic conditions. In the final chapter, I show how macroeconomic policy can reduce the risks associated with changing economic conditions. First, I examine a 1999 UK reform that lowered from two years to one year the tenure necessary for a worker to be able to sue their employer for unfair dismissal. After the reform, we observe a significant decrease in the firing hazard for workers with zero to two years tenure relative to the control group, and no overall increase in unemployment. Using a simple model based on the assumption that firms learn about match quality over time, I show that the empirical results are consistent with increased match quality after the reform. Second, I generalize the simple model developed in the first chapter. In particular, I allow for match quality to change over time. The model is useful to understand and predict how firing costs and various forms of uncertainty affect the separation hazard. Thirdly, I analyze the implementation of unfair dismissal legislation by judges in the UK. Judges seem to compromise between workers' and firms' interests. If workers are unemployed, judges decide more often in their favour when unemployment rates are higher. The reverse is true when workers have found a new job. Finally, in work co-authored with Philippe Aghion, we examine whether the government borrowing and spending more in recessions can increase growth by relaxing economic agents' credit constraints. Using a panel data of OECD countries, we find that indeed countercyclical public debt policy is more growth enhancing when private credit is less abundant.
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