Labour distribution affected by firing costs: Bank of Canada paper

The higher the cost to fire permanent staff, the more wage inequality there is between employees, according to a Bank of Canada paper, published on Friday.

Shutao Cao, Enchuan Shao and Pedro Silos, the paper's authors, examine the conditions under which firms and workers decide whether to enter a permanent or a temporary relationship to identify to what extent firing costs help shape the wage distribution. The authors note that firms offer permanent contracts to 'good' matches, as they risk losing the worker should they offer them a temporary contract, whereas not-so-good matches are given a temporary contract under which they work for a lower wage.

The authors find that a substantial increase in inequality follows an increase in the level of firing costs and that the rise in inequality is entirely due to the increase in the fraction of temporary workers, not an increase in the permanent worker premium – the ratio of the wage a permanent worker earns relative to that a temporary worker.

Click here to read the paper.