Firing Costs, Employment Fluctuations and Average Employment : An Examination of Germany

West Germany's Employment Promotion Act of 1985 facilitated the use of fixed-term contracts and increased the number of dismissals above which the employer is required to establish a "social plan" (involving severance payments). I assess the effect of this reduction in "firing costs" on movements in employment, using monthly data on a panel of detailed manufacturing industries for 1977-92. I also examine the effect of introducing flexible hours of work in certain industries beginning in 1985. I find that employment adjustment was unaffected by the lower firing costs, but slowed by the greater working hours flexibility