February 10, 2017
Donald Trump has used his podium on several occasions to harangue companies about moving jobs overseas. This is probably not an effective way to conduct economic policy, but Justin Wolfers misled NYT readers in claiming:
“Research shows that efforts to boost employment by making it difficult or costly to fire workers have backfired. The prospect of a costly and lengthy legal battle for laid-off employees makes it less appealing to hire new workers. The result has been that higher firing costs have led to to weaker productivity, sclerotic labor markets and higher unemployment.”
Actually, more recent research results, including more recent work from the OECD (the source to which he links), show that there is no necessary link between restrictions on firing and unemployment. While excessive restrictions on firing can undoubtedly hurt employment and growth, there is no reason to assume that moderate amounts of severance pay, or other disincentives to dismiss workers, will discourage investment and hiring.
A requirement to give longer term workers severance pay when dismissed does change the incentives facing an employer. In this situation they have more incentive to retrain workers to ensure that they are as productive as possible. They may also opt to invest more in existing facilities rather than move overseas in order to avoid severance pay.
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