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Evaluating labor market reforms: A normative analysis

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  • Poilly, Céline
  • Wesselbaum, Dennis

Abstract

This paper shows that a reform aimed at improving labor market flexibility is not necessarily welfare-enhancing. We adopt a New-Keynesian model enriched with search and matching frictions. We investigate the effects of institutional labor market reforms, described by a permanent change in firing costs and unemployment benefits. Improving labor market flexibility by cutting unemployment benefits is welfare-enhancing for households. On the contrary, cutting firing costs reduces welfare. We argue that real wage dynamics play a crucial role in the results. Furthermore, welfare effects tend to zero when the reform is pre-announced.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 39 (2014)
Issue (Month): PA ()
Pages: 156-170

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Handle: RePEc:eee:jmacro:v:39:y:2014:i:pa:p:156-170

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Labor market policies; Search and matching frictions; Welfare;

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Cited by:
  1. Dennis Wesselbaum, 2010. "Firing Tax vs. Severance Payment - An Unequal Comparison," Kiel Working Papers 1644, Kiel Institute for the World Economy.

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