This research seeks to provide answers to three interrelated crucial policy questions on the interdependency of labour and product markets, focusing on the costs, structure and consequences of employment adjustment costs. To this aim, I propose to extend the strong theoretical foundation of dynamic search-matching models, introducing firm specific stochastic productivity shocks, and to structurally estimate these models on Danish exhaustive employer-employee data, with rich information on the firms’ financial variables. My proposed theoretical and empirical approaches use methodology at the research frontier within three different Economics subfields: Labour Economics, Industrial Organization, and Structural Micro-Econometrics. The three specific questions I target in this proposal are the following: 1. How are employment adjustment costs shared between workers who search for jobs and firms that pay hiring and firing costs? 2. How do economic booms and busts affect the age-related structure of the firms’ workforce adjustment? 3. How does labour adjustment affect sorting patterns between workers and firms? The Danish economy is ideal ground for the proposed research given its unusual combination of labour market institutions, such as high labour flexibility, generous safety nets and wage compression. The proposed structural modelling framework allows consideration of policy experiments where the weight of each of these institutions can be assessed, the results of this exercise becoming worldwide relevant. This research proposal is also extremely timely in the light of business cycle booms and busts, in particular considering the currently unfolding economic crisis.
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