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Flexibility at the Margin and Labor Market Volatility in OECD Countries

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  • Hector Sala
  • José I. Silva
  • Manuel Toledo

Abstract

We argue that segmented labor markets with flexibility at the margin (e.g., just affecting fixed-term employees) may 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. Moreover, in the presence of limitations in the duration and number of renewals of fixed-term contracts, firms respond by fostering labor turnover which further raises the volatility of the labor market. We present a matching model with temporary and permanent jobs where (i) the gap in firing costs and (ii) restrictions in the use of fixedterm contracts play the central role to explain the similar volatility observed in many regulated labor markets with flexibility at the margin vis-à-vis the fully deregulated ones.
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Suggested Citation

  • Hector Sala & José I. Silva & Manuel Toledo, 2012. "Flexibility at the Margin and Labor Market Volatility in OECD Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 991-1017, September.
  • Handle: RePEc:bla:scandj:v:114:y:2012:i:3:p:991-1017 DOI: j.1467-9442.2012.01715.x
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    More about this item

    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, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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