Do labor market conditions affect the strictness of employment protection legislation?
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.
Volume (Year): 10 (2008)
Issue (Month): 4 ()
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- Andrea Ichino & Michele Polo & Enrico Rettore, "undated".
"Are Judges Biased by Labor Market Conditions?,"
192, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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Cornell University, ILR School, vol. 64(4), pages 673-698, July.
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- 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.
- 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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