Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship
AbstractWe endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0865.
Date of creation: Apr 2008
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
search; bargaining; asymmetric information; labor market reform;
Other versions of this item:
- Matouschek, Niko & Ramezzana, Paolo & Robert-Nicoud, Frédéric, 2009. "Labor market reforms, job instability, and the flexibility of the employment relationship," European Economic Review, Elsevier, vol. 53(1), pages 19-36, January.
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-07 (All new papers)
- NEP-BEC-2008-06-07 (Business Economics)
- NEP-CTA-2008-06-07 (Contract Theory & Applications)
- NEP-DGE-2008-06-07 (Dynamic General Equilibrium)
- NEP-LAB-2008-06-07 (Labour Economics)
- NEP-REG-2008-06-07 (Regulation)
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