My previous post has apparently produced some incomprehension. I thought it was a rather simple point, but I guess I should have been less telescopic.
Here is the point.
Spain’s unemployment has doubled since 2008, going from 10 percent to 20 percent. That is a hell of a shock to labor demand. Let’s assume, quite reasonably, that this shock to labor demand was unanticipated. Now, if the hiring costs were at all binding during this time, firms must have laid off fewer workers than they would have liked absent those costs. In other words, the unemployment rate would have risen even higher without firing costs.
If we now remove those firing costs, we make it easier for firms to shed the extra workers they have on their payroll. So unemployment has to increase.
Some commentators have the idea that with firing costs gone, the steady-state labor demand will be higher. I am not sure the empirical literature has established that point, but let me grant it for the purposes of the argument. So in principle some of the increased ability to lay off workers can be compensated by the desire to hire more workers since labor costs effectively have been reduced.
Can the second effect dominate the first? I don’t know. But given the magnitude of the negative demand shock during this crisis, I doubt it.
In any case, I find it weird that this policy is presented as a major tool for curing what ails labor markets at the moment.