Short job tenures and firing taxes in the search theory of unemployment

This paper studies the effects of firing taxes on the job destruction rate, when probation period - or temporary contract - policies are implemented in an otherwise exogenous job separation search model. It is shown that contrary to conventional wisdom, firing taxes can amplify the job turnover rate by providing incentives to destroy surviving matches at the end of the probation period. Moreover, low skill workers are shown to be more severely affected while wage inequality across different productivity groups may increase.