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Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship

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  • Matouschek, Niko
  • Ramezzana, Paolo
  • Robert-Nicoud, Frédéric

Abstract

We analyse a search model of the labour market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labour market frictions induces more aggressive wage bargaining behaviour, which in turn leads to a costly increase in job insecurity. This adverse insecurity effect can be so large that firms and workers who are in an employment relationship can be made worse off by a fall in labour market frictions. In contrast, firms and workers who are not in an employment relationship and are searching the market for a counterpart are always made better off by such a fall in labour market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labour market frictions induces a one-off reorganization in which firms and workers switch from a rigid employment relationship to a flexible one. This reorganization leads to a large, one-off increase in job insecurity and unemployment.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4193.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4193

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Keywords: flexibility of employment relationships; job insecurity; private information;

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  1. Lewis Segal & Daniel Sullivan, 1996. "The growth of temporary services work," Working Paper Series, Macroeconomic Issues WP-96-26, Federal Reserve Bank of Chicago.
  2. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Kenneth Scheve & Matthew Slaughter, 2002. "Economic Insecurity and the Globalization of Production," NBER Working Papers 9339, National Bureau of Economic Research, Inc.
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  8. Ron Dore, 1996. "The End of Jobs for Life? Corporate Employment Systems: Japan and Elsewhere," CEP Occasional Papers 11, Centre for Economic Performance, LSE.
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  10. Ramey Garey & Watson Joel, 2001. "Bilateral Trade and Opportunism in a Matching Market," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-35, November.
  11. Thesmar, David & Thoenig, Mathias, 2002. "Why is a Flexible World More Insecure? The Way Outsourcing Amplifies Uncertainty," CEPR Discussion Papers 3629, C.E.P.R. Discussion Papers.
  12. Leora Friedberg & Anthony Webb, 2003. "Retirement and the Evolution of Pension Structure," NBER Working Papers 9999, National Bureau of Economic Research, Inc.
  13. Williams, Steven R., 1987. "Efficient performance in two agent bargaining," Journal of Economic Theory, Elsevier, vol. 41(1), pages 154-172, February.
  14. Leora Friedberg & Michael Owyang, 2004. "Explaining the Evolution of Pension Structure and Job Tenure," NBER Working Papers 10714, National Bureau of Economic Research, Inc.
  15. repec:wop:humbsf:2001-102 is not listed on IDEAS
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