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Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship

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  • Niko Matouschek
  • P Ramezzana
  • Frédéric Robert-Nicoud

Abstract

We 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 Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0865.

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Date of creation: Apr 2008
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Handle: RePEc:cep:cepdps:dp0865

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: search; bargaining; asymmetric information; labor market reform;

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  1. Burguet, Roberto & Caminal, Ramon & Matutes, Carmen, 2002. "Golden cages for showy birds: Optimal switching costs in labor contracts," European Economic Review, Elsevier, vol. 46(7), pages 1153-1185, July.
  2. L. Rachel Ngai & Christopher Pissarides, 2008. "Employment outcomes in the welfare state," LSE Research Online Documents on Economics 3599, London School of Economics and Political Science, LSE Library.
  3. César Alonso-Borrego & Jesús Fernández-Villaverde & José E. Galdón-Sánchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," PIER Working Paper Archive 04-016, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Schmitz, Patrick W., 2004. "Job Protection Laws and Agency Problems Under Asymmetric Information," CEPR Discussion Papers 4031, C.E.P.R. Discussion Papers.
  5. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  6. Espen R. Moen & A Rosen, 2007. "Incentives in Competitive Search Equilibrium," CEP Discussion Papers dp0832, Centre for Economic Performance, LSE.
  7. Niko Matouschek, 2004. "Ex Post Inefficiencies in a Property Rights Theory of the Firm," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 125-147, April.
  8. Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, vol. 122(1), pages 60-99, May.
  9. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  10. Cesar Alonso-Borrego & Jesus Fernandez-Villaverde & Jose Galdon-Sanchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," Working Papers 866, Princeton University, Department of Economics, Industrial Relations Section..
  11. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
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Cited by:
  1. Poilly, Céline & Wesselbaum, Dennis, 2014. "Evaluating labor market reforms: A normative analysis," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 156-170.
  2. Sabine Klinger & Thomas Rothe, 2012. "The Impact of Labour Market Reforms and Economic Performance on the Matching of the Short‐term and the Long‐term Unemployed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(1), pages 90-114, 02.

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