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Job and Workers Flows in Europe and the US: Specific Skills or Employment Protection?. Midwest Macroeconomics Meetings 2007, April 27-29, 2007, Cleveland, Ohio

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  • Delacroix, Alain

    (Centre interuniversitaire de recherche sur les politiques économiques et l'emploi (CIRPEE))

  • Wasmer, Etienne

    (Département d'économie)

Abstract

There is more resistance to layoffs in continental Europe than in the U.S. At the same time, there is some evidence that employed European workers are more productive than their American counterparts. We reconcile these two facts by proposing that some institutions, such as Employment Protection Legislation (EPL), induce workers to invest in and develop job specific skills, making them more productive and leading to costly displacement as these types of skills are lost upon separation from the employer. It is also well established that mobility patterns -flows in and out of unemployment or even movements from job to job, are reduced in continental Europe relative to the U.S. The possibility to invest in skill improvement introduces a complementarity between EPL and the investment decision: more stable matches increase the incentive to accumulate specific skills; but also more productive matches are broken less frequently; hence there is a “mutliplier” effect arising from this complementarity. To quantitatively assess all these propositions, we built a tractable asymmetric information matching model featuring all types of transitions out of employment: layoffs, quits to unemployment and job-to-job transitions. We find that EPL does induce workers to invest more in human capital and may help explain greater resistance to layoffs in Europe. We find that flows out of employment are indeed reduced by EPL. However, allowing for skill investment does not generate any strong multiplier due to the fact several new effects are at play keeping unemployment duration at a low level and thus putting downward pressure on the multiplier. The conclusion of all this may be that EPL matters for explaining specialization and low movements out of jobs, but that low movements out of unemployment may be better explained by other institutions such as unemployment benefits.

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Date of creation: 29 Apr 2007
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  1. Henry S. Farber, 2005. "What do we know about Job Loss in the United States? Evidence from the Displaced Workers Survey, 1984-2004," Working Papers 877, Princeton University, Department of Economics, Industrial Relations Section..
  2. Ana Lamo & Julian Messina & Etienne Wasmer, 2007. "Are Specific Skills an Obstacle to Labor Market Adjustment? Theory and an Application to the EU Enlargement," CSEF Working Papers 172, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
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  9. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
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  12. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
  13. Alain Delacroix, 2003. "Heterogeneous Matching with Transferable Utility: Two Labor Market Applications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 313-330, February.
  14. Olivier Blanchard & Pedro Portugal, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  15. George Alessandria & Alain Delacroix, 2004. "Trade and the (Dis) Incentive to Reform Labor Markets: The Case of Reform in the European Union," 2004 Meeting Papers 460, Society for Economic Dynamics.
  16. Arnaud Lefranc, 2003. "Labor Market Dynamics and Wage Losses of Displaced Workers in France and the United States," William Davidson Institute Working Papers Series 2003-614, William Davidson Institute at the University of Michigan.
  17. Éva Nagypál, 2006. "On the extent of job-to-job transitions," 2006 Meeting Papers 10, Society for Economic Dynamics.
  18. Alain Delacroix, 2003. "Transitions into Unemployment and the Nature of Firing Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 651-671, July.
  19. Henry S. Farber, 1998. "Mobility and Stability: The Dynamics of Job Change in Labor Markets," Working Papers 779, Princeton University, Department of Economics, Industrial Relations Section..
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