Employment Flows , Capital Mobility , and Policy

This paper extends Hopenhayn and Rogerson’s analysis of firing taxes by introducing a flexible form of capital and considering transitionary dynamics. The paper finds that capital is not important for understanding the long run and welfare effects of firing taxes. However, capital is crucial for determining the short run consequences of eliminating this type of policy. 1I am deeply indebted to Richard Rogerson for his advice. I would also like to thank two anonymous referees for their suggestions, and Michael Keane, Tim Kehoe, Nobu Kiyotaki, Ed Prescott and Bruce Smith for helpful discussions. I have also benefited from the comments of seminar participants at Cornell University, Iowa State University, Michigan State University, the Federal Reserve Bank of Richmond, University of Rochester, University of Pennsylvania, Queens University and the 1995 Northwestern University Summer Workshop. The views expressed here do not necessarily reflect the position of the Federal Reserve Bank of Chicago or the Federal Reserve System.