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Do labor market conditions affect the strictness of employment protection legislation?

Author

Listed:
  • Riccardo Tilli

    (Department of Public Economics - Sapienza - University of Rome)

  • Enrico Saltari

    (Department of Public Economics - Sapienza - University of Rome)

Abstract

We provide a theoretical microfoundation for the negative relationship between firing costs and labor market tightness and its effects on labor market performance. The optimal level of firing costs is chosen by the employed worker i.e. the insider by maximizing her human capital. Performing a comparative statics exercise, we analyze the effects of labor market tightness on the optimal choice of firing costs. The results are clear cut and allow to obtain a decreasing firing costs function in the labor market tightness. Moreover, we show that this negative relationship can give rise to a labor market configuration characterized by multiple equilibria: prolonged average duration of unemployment will produce a labor market with low flows and high strictness of employment protection, and vice versa.

Suggested Citation

  • Riccardo Tilli & Enrico Saltari, 2008. "Do labor market conditions affect the strictness of employment protection legislation?," Economics Bulletin, AccessEcon, vol. 10(4), pages 1-9.
    • Handle: RePEc:ebl:ecbull:eb-08j60003
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    References listed on IDEAS

    as
    1. 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.
    2. Saltari Enrico & Tilli Riccardo, 2004. "Labor Market Performance and Flexibility: Which Comes First?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-25, March.
    3. 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," The Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 427-462, June.
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    Cited by:

    1. Enrico Saltari, 2012. "The role of ICT and Business Services in Italy," Working Papers in Public Economics 152, Department of Economics and Law, Sapienza University of Rome.
    2. Saltari, Enrico & Tilli, Riccardo, 2009. "The role and significance of endogenous firing costs in a matching model with endogenous job destruction," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(5), pages 799-808, October.

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    More about this item

    Keywords

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    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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