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Do Labor Market Conditions Affect the Strictness of Employment Protection Legislation?

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Author Info
SALTARI ENRICO
TILLI RICCARDO

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Abstract

We provide a theoretical microfoundation for the inverse relationship between firing costs and labor market tightness and evaluate the effects of this relationship on labor market performance in a matching model à la Mortensen and Pissarides (1994). Results are clear cut and generalize our previous work. First, a sufficient condition to have a firing cost function with a negative slope is when the elasticity of the separation rate with respect to firing costs is equal to one, i.e. when the median voter (which is the employed worker) takes into account in her choice of optimal level of firing costs only the unemployment duration during her lifetime but not the potential gains or losses in terms of wage. Second, the optimal behavior of the economic agents can give rise to a labor market configuration characterized by multiple equilibria: high average duration of unemployment will produce a labor market with low flows and wage and high strictness of employment protection, and vice versa.

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Paper provided by Tor Vergata University, CEIS in its series Departmental Working Papers with number 240.

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Date of creation: Sep 2006
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Handle: RePEc:rtv:ceiswp:240

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  1. Ioana Marinescu, 2008. "Are Judges Sensitive to Economic Conditions? Evidence from UK Employment Tribunals," Working Papers 0802, Harris School of Public Policy Studies, University of Chicago. [Downloadable!]
  2. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier. [Downloadable!] (restricted)
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  3. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August. [Downloadable!] (restricted)
  4. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," Review of Economic Studies, Blackwell Publishing, vol. 71(1), pages 43-61, 01. [Downloadable!] (restricted)
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  5. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October. [Downloadable!] (restricted)
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  6. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 381-402, July. [Downloadable!] (restricted)
  7. Enrico Saltari & Riccardo Tilli, 2004. "Labor Market Performance and Flexibility: Which Comes First?," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  8. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May. [Downloadable!] (restricted)
  9. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  10. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier. [Downloadable!] (restricted)
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  11. Tito Boeri & J. Ignacio Conde-Ruiz, 2004. "Against Labour Market Risk: Employment Protection or Unemployment Benefits?," 2004 Meeting Papers 560, Society for Economic Dynamics. [Downloadable!]
  12. Olivier Blanchard & Pedro Portugal, 1998. "What Hides Behind an Umemployment Rate: Comparing Portuguese and U.S. Unemployment," NBER Working Papers 6636, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October. [Downloadable!] (restricted)
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  14. Siegelman, Peter & Donohue, John J, III, 1995. "The Selection of Employment Discrimination Disputes for Litigation: Using Business Cycle Effects to Test the Priest-Klein Hypothesis," Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 427-62, June.
  15. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March. [Downloadable!]
  16. Tito Boeri & J.Ignacio Conde-Ruiz & Vincenzo Galasso, 2003. "Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?," Working Papers 239, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  17. Barbara Petrongolo & Christopher A. Pissarides, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June. [Downloadable!] (restricted)
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  18. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June. [Downloadable!] (restricted)
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  1. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy. [Downloadable!]
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