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Evaluating labor market reforms: A normative analysis

  • Poilly, Céline
  • Wesselbaum, Dennis

This paper shows that a reform aimed at improving labor market flexibility is not necessarily welfare-enhancing. We adopt a New-Keynesian model enriched with search and matching frictions. We investigate the effects of institutional labor market reforms, described by a permanent change in firing costs and unemployment benefits. Improving labor market flexibility by cutting unemployment benefits is welfare-enhancing for households. On the contrary, cutting firing costs reduces welfare. We argue that real wage dynamics play a crucial role in the results. Furthermore, welfare effects tend to zero when the reform is pre-announced.

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File URL: http://www.sciencedirect.com/science/article/pii/S0164070413001717
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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 39 (2014)
Issue (Month): PA ()
Pages: 156-170

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Handle: RePEc:eee:jmacro:v:39:y:2014:i:pa:p:156-170
DOI: 10.1016/j.jmacro.2013.10.004
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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