Two Tier Reforms of Employment Protection: A Honeymoon Effect?
Labor market reforms increasing flexibility at the margin have been recently paying out in terms of employment growth. This paper argues that two-tier labor market reforms have a transitional honeymoon, job creating effect. In a dynamic model of labor demand under uncertainty, the paper predicts that in the aftermath of reforms, beyond an increase in employment, there should be a reduction in employment inaction and in the mean and cross sectional variance of labor productivity. Based on a variety of firm-level data on Italy in the period 1995-2000, we find evidence of our empirical implications.
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