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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. Ron Dore, 1996. "The End of Jobs for Life? Corporate Employment Systems: Japan and Elsewhere," CEP Occasional Papers 11, Centre for Economic Performance, LSE.
  2. Annette Bergemann & Antje Mertens, 2002. "Job Stability Trends, Layoffs and Quits - An Empirical Analysis for West Germany," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C1-4, International Conferences on Panel Data.
  3. Lewis M. Segal & Daniel G. Sullivan, 1997. "The Growth of Temporary Services Work," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 117-136, Spring.
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  5. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
  6. Robert E. Hall & Edward P. Lazear, 1982. "The Excess Sensitivity of Layoffs and Quits to Demand," NBER Working Papers 0864, National Bureau of Economic Research, Inc.
  7. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  8. repec:wop:humbsf:2001-102 is not listed on IDEAS
  9. Williams, Steven R., 1987. "Efficient performance in two agent bargaining," Journal of Economic Theory, Elsevier, vol. 41(1), pages 154-172, February.
  10. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  11. 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.
  12. Kenneth Scheve & Matthew Slaughter, 2002. "Economic Insecurity and the Globalization of Production," NBER Working Papers 9339, National Bureau of Economic Research, Inc.
  13. 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.
  14. Leora Friedberg & Anthony Webb, 2005. "Retirement and the Evolution of Pension Structure," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
  15. Schmidt, Stefanie R, 1999. "Long-Run Trends in Workers' Beliefs about Their Own Job Security: Evidence from the General Social Survey," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages S127-41, October.
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