This paper offers a critical survey of the literature on labor market rigidities, developing a simple and unifying analytical framework. The main conclusion that emerges is that firing restrictions do not seem to exert strong direct effects on the unemployment level, while they are important for determining its dynamics, the duration of the unemployment spells and the overall efficiency of the economy. These indirect effects might play a prominent role for the unemployment level and for the general performance of the economy. In addition to considering indirect effects, we extend the concept of flexibility beyond the notion of firing restrictions. In particular, we illustrate the role of firing restrictions in determining the evolution of wages and the composition of the unemployment pool; the effects of a common wage for regions with different productivity levels and an immobile labor force; the influence on capital accumulation and growth of the inefficient labor allocation induced by firing restriction. These aspects might be more important to understand the performance of the European labor markets over the last thirty years than firing restrictions themselves.
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Volume (Year): 59 (2000) Issue (Month): 1 (April) Pages: 117-143 Download reference. The following formats are available: HTML
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Handle: RePEc:gde:journl:gde_v59_n1_p117-143
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Find related papers by JEL classification: E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings
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