Big shock, slow growth and the dynamics of aggregate labour demand with firing costs

This paper studies the dynamic properties of the labour demand model with non-convex adjustment costs proposed by Bentolila and Bertola [1990]. With this model we evaluate the importance of the firing costs, following a great shock, for the dynamics of adjustment of the aggregated labour demand of a stationary state to an other. The model is calibrated on the French economy, and studies the transition following the shock of 1973-74,-i.e. a shock on the price of oil as well as the transition from a rapid and stable growth to a slow and uncertain one. We show that in this case, a drastic reduction of the firing costs when the shock occurs does not allow to modify substantially the path of the economy.