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

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  • Niko Matouschek
  • Paolo Ramezzana
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    Abstract

    We analyze a search model of the labor market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labor market frictions induces more aggressive wage bargaining behavior 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 labor 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 labor market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labor 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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    File URL: http://repec.org/esNASM04/up.23923.1070558832.pdf
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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 28.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:nasm04:28

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

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    1. Leora Friedberg & Anthony Webb, 2005. "Retirement and the Evolution of Pension Structure," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
    2. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    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.
    4. 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.
    5. Leora Friedberg & Michael Owyang, 2004. "Explaining the Evolution of Pension Structure and Job Tenure," NBER Working Papers 10714, National Bureau of Economic Research, Inc.
    6. 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.
    7. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. 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.
    9. Bergemann, Annette & Mertens, Antje, 2000. "Job stability trends, layoffs and quits: An empirical analysis for West Germany," SFB 373 Discussion Papers 2001,102, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    10. repec:wop:humbsf:2001-102 is not listed on IDEAS
    11. 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.
    12. Ron Dore, 1996. "The End of Jobs for Life? Corporate Employment Systems: Japan and Elsewhere," CEP Occasional Papers 11, Centre for Economic Performance, LSE.
    13. Kenneth Scheve & Matthew Slaughter, 2002. "Economic Insecurity and the Globalization of Production," NBER Working Papers 9339, National Bureau of Economic Research, Inc.
    14. 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.
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