The Costs of Firm Exit and Labour Market Policies: New Evidence from Europe

The churning of firms is an inherent process of industrialized economies, which entails a high rate of job destruction. Thus, a key question is: what are the policies that minimize the costs of worker displacement due to business closure? Accordingly, this paper exploits a retrospective panel of workers in 13 European countries over the period 1985-2008 to explore the factors which shape the reemployment prospects of workers displaced due to business closure. The results suggest that higher spending on active labour market policies increases the reemployment prospects of the unemployed workers displaced by business closure, both in terms of unemployment duration and in terms of stability of reemployment. On the contrary, there is evidence of a negative and sizable impact of passive labour market policies on unemployment duration.