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Does the Market Provide Sufficient Employment Protection?

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  • Burguet, Roberto
  • Caminal, Ramón

Abstract

This Paper examines the role of employment protection when firms learn over time about the value of the match. When parties can commit to future wages, equilibrium contracts stipulate positive severance payments as an instrument to induce efficient lay-off decisions and there is no room for public intervention. When parties cannot commit to future wages, ex-post bargaining leads to excessive dismissals, and therefore the market provides insufficient employment protection. In this case, a Pigouvian tax/subsidy scheme will correct the inefficiency by enhancing employment protection.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4198.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4198

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Keywords: employment protection; experimentation; lay-offs; severance payments;

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References

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  1. José Enrique Galdón Sánchez & Maia Güell, 2001. "Dismissal conflicts and unemployment," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0105, Departamento de Economía - Universidad Pública de Navarra.
  2. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 43-61.
  3. 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.
  4. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  5. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-07, May.
  6. Joaquín Lorences & Victor Fernandez & César Rodríguez, 1995. "Diferencias interterritoriales de salarios y negociación colectiva en España," Investigaciones Economicas, Fundación SEPI, vol. 19(2), pages 309-324, May.
  7. Fella, Giulio, 2000. "Efficiency wage and efficient redundancy pay," European Economic Review, Elsevier, vol. 44(8), pages 1473-1490, August.
  8. Booth, Alison L, 1995. "Layoffs with Payoffs: A Bargaining Model of Union Wage and Severance Pay Determination," Economica, London School of Economics and Political Science, vol. 62(248), pages 551-64, November.
  9. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
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  11. Richard Arnott & Arthur Hosios & Joseph Stiglitz, 1983. "Implicit Contracts, Labour Mobility and Unemployment," Working Papers 543, Queen's University, Department of Economics.
  12. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  13. Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
  14. Julia Fath & Clemens Fuest, 2005. "Experience Rating versus Employment Protection Laws in a Model where Firms Monitor Workers," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 299-314, 06.
  15. Booth, Alison & Chatterji, Monojit, 1989. "Redundancy Payments and Firm-Specific Training," Economica, London School of Economics and Political Science, vol. 56(224), pages 505-21, November.
  16. 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.
  17. Burguet, Roberto & Caminal, Ramón, 2004. "Does the Market Provide Sufficient Employment Protection?," CEPR Discussion Papers 4198, C.E.P.R. Discussion Papers.
  18. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  19. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  20. Olivier Blanchard & Jean Tirole, 2004. "The Optimal Design of Unemployment Insurance and Employment Protection. A First Pass," NBER Working Papers 10443, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Burguet, Roberto & Caminal, Ramon, 2008. "Does the market provide sufficient employment protection?," Labour Economics, Elsevier, vol. 15(3), pages 406-422, June.
  2. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy.

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