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Flexibility at the Margin and Labor Market Volatility in OECD Countries

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Author Info
Sala, Hector () (Universitat Autònoma de Barcelona)
Silva, José I. () (Universitat Jaume I de Castelló)
Toledo, Manuel E. () (Universidad Carlos III, Madrid)

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Abstract

We study whether segmented labor markets with flexibility at the margin (e.g., just affecting fixed-term employees) can achieve similar volatility than fully deregulated labor markets. Flexibility at the margin produces a gap in separation costs among matched workers that cause fixed-term employment to be the main workforce adjustment device, which in turn increases de labor market volatility. This increased volatility is partially reverted when limitations in the duration and number of renewals of fixed-term contracts are introduced. Under this scenario, firms respond by reducing the intensity of job destruction since it becomes more difficult to avoid firing costs in permanents contracts. We present a matching model with temporary and permanent jobs where (i) the gap in firing costs and (ii) restrictions in the use of fixed-term contracts helps explain the similar volatility observed in many regulated OECD labor markets with flexibility at the margin vis-à-vis the fully deregulated ones.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3293.

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Date of creation: Jan 2008
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Handle: RePEc:iza:izadps:dp3293

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Related research
Keywords: separation costs volatility flexibility at the margin matching model

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Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs

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  15. Juan J Dolado & Carlos Garcia--Serrano & Juan F. Jimeno, 2002. "Drawing Lessons From The Boom Of Temporary Jobs In Spain," Economic Journal, Royal Economic Society, vol. 112(721), pages F270-F295, June. [Downloadable!] (restricted)
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  16. David H. Autor & William R. Kerr & Adriana D. Kugler, 2007. "Does Employment Protection Reduce Productivity? Evidence From US States," Economic Journal, Royal Economic Society, vol. 117(521), pages 189-217, 06. [Downloadable!] (restricted)
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