Employment Dynamics with Convex Hiring Rules

The non-linearity of the hiring rule can generate asymmetric responses of employment growth to shocks, and, hence, stimulate significant skewness and movements in the volatility. This paper argues that the institutional setting determines the shape of the hiring rule, which endogenously transforms the distribution of employment growth, and defines whether aggregate employ ment growth volatility is counter- or pro-cyclical. We test the hypothesis on an economy characterized by a strong employment protection and high firing costs. To provide additional evidence on the shape of the hiring rule, we fur ther test the mechanism on countries with different labor adjustment costs. We conclude that countries with more rigid labor markets are characterized by a convex hiring rule, and induce pro-cyclical volatility