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Firing costs are often blamed for unemployment. In this paper, we investigate this widespread belief theoretically. Firing costs are introduced in an efficiency wage model to capture their effects on employment through wages. In addition, dismissal conflicts are modelled explicitly and their cost is derived. These two elements are included and linked. Modelling firing costs in a context where worker effort is not perfectly observable implies that a double moral hazard problem could arise. Whenever firms face a redundancy, they tend to use disciplinary dismissals in order to avoid paying firing costs. Similarly, workers will then tend to deny any disciplinary case to get a compensation. Our claim in this paper is that the resolution of this problem by a third party will be imperfect given the information problem. This implies that disciplinary dismissals will not be costless. Firing costs in turn will have a negative effect on aggregate employment because they modify the rent that has to be paid to workers to prevent shirking. We also find that the solution to the problem does not necessarily imply the elimination of firing costs. ; M. Güell gratefully acknowledges financial support from the Spanish Ministry of Science and Technology (Project No. BEC2000-1026). J.E. Galdón-Sánchez thanks financial support from the DGICYT P98-0139 and the European Commission for a TRM Marie Curie Fellowship.

SUMMARY
In Europe, the need for additional funding coming from either budget cuts and/or increased costs due to increased competition in university quality has reopened the debate on the financing of university systems. An attractive alternative to the current general-tax-financed subsidies is Income Contingent Loans (ICL), a flexible scheme that puts more weight on private resources while enhancing progressivity. One challenge of the viability of ICL systems is the functioning of the labor market for university graduates. This paper offers a general analysis of the economics of ICL, followed by an application to Spain. We set up a loan laboratory in which we can explore the distributional effects of different loan systems to finance tertiary education at current costs as well as to increase university funding to improve its quality. We use simulated lifetime earnings of graduates matching the dynamics of employment and earnings in the Spanish administrative social security data to calculate the burden of introducing ICL for individuals at different points of the earnings distribution and for the government. We find that (1) our proposed structure is highly progressive under all specifications, with the top quarter of the distribution paying close to the full amount of the tuition and the bottom 10% paying almost no tuition and (2) the share of total university education subsidized by the government is between 16 and 56 percentage points less than under the current system.