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On the Efficiency of Job and Income Protection in the Dynamic Labour Markets

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  • Juha Kilponen

Abstract

This paper investigates the efficiency implications of two kinds of worker protection, job security and income protection. Both of them have important aggregate efficiency effects in the dynamic labor markets, where worker mobility is costly. In the absense of firing costs, income security has ambiguous effect on production efficiency. If mobility costs are very high, dynamic costs associated to reallocation outweighs a gain from static productive efficiency as more jobs are created into high productivity sector, but need to be reallocated always when the sector is hit by a negative productivity shock. On the contrary, if mobility costs are low, a static efficiency outweighs the dynamic costs associated to reallocation. Employment protection is also more costly in the terms of productive efficiency, more it involves wasted admistrative and red-tape costs for the firms. When both job security and income protection are high, it makes labor markets more rigid and in general reduces the productive efficiency.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 219.

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Date of creation: 31 May 2000
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Handle: RePEc:fer:dpaper:219

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Keywords: Labour markets; firing costs; income protection;

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  1. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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  17. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  18. Paolo Mauro & Antonio Spilimbergo, 1998. "How Do the Skilled and the Unskilled Respond to Regional Shocks? the Case of Spain," IMF Working Papers 98/77, International Monetary Fund.
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