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Employment Protection Reform in European Labor Markets: The Collective Bargaining Regime Matters

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  • Francesco Palma

    (Université de Strasbourg, Université de Lorraine)

  • Yann Thommen

    (Université de Strasbourg, Université de Lorraine)

Abstract

Policy advisers repeatedly call on Western European countries to reform their employment protection legislation (EPL) by switching to a layoff tax model of unemployment insurance (UI) funding. This new design, partly based on the existing “experience-rating” (ER) system in the U.S., should induce firms to internalize layoff fiscal costs and hence reduce unemployment. However, its success remains uncertain in economies with a collective wage-setting system, as do those of many Western European countries. Using a matching model with endogenous job destruction, we provide an ex-ante evaluation of this policy reform’s effects on labor market outcomes and aggregate welfare in firm-level and sector-level bargaining economies. Our numerical analyses yield two main results. First, compared to simply increasing firing/dismissal costs, implementing an ER system improves labor market outcomes in both types of economies. Second, the design of the reform has to be adapted to the level of wage bargaining in the economy. Because firms can adjust most of the terms and conditions of employment (including wages) in decentralized negotiations, adding ER to existing EPL yields the largest reduction in unemployment under firm-level bargaining, while with sector-level bargaining, ER is better implemented with a relaxation of existing EPL. However, if the aim is to increase aggregate welfare, it is better under both bargaining regimes to relax existing EPL when implementing ER.

Suggested Citation

  • Francesco Palma & Yann Thommen, 2020. "Employment Protection Reform in European Labor Markets: The Collective Bargaining Regime Matters," De Economist, Springer, vol. 168(4), pages 541-575, December.
  • Handle: RePEc:kap:decono:v:168:y:2020:i:4:d:10.1007_s10645-020-09370-1
    DOI: 10.1007/s10645-020-09370-1
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    1. Employment protection reform in European labor markets: the collective bargaining regime matters.
      by Christian Zimmermann in NEP-DGE blog on 2019-05-30 22:26:26

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    More about this item

    Keywords

    Search and matching models; Collective bargaining; Experience rating; Employment protection;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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