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Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship

Author

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  • Niko Matouschek
  • P Ramezzana
  • Frédéric Robert-Nicoud

Abstract

We endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.

Suggested Citation

  • Niko Matouschek & P Ramezzana & Frédéric Robert-Nicoud, 2008. "Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship," CEP Discussion Papers dp0865, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0865
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    References listed on IDEAS

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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    2. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute for the Study of Labor (IZA).
    3. L. Rachel Ngai & Christopher A. Pissarides, 2008. "Employment Outcomes in the Welfare State," Revue économique, Presses de Sciences-Po, vol. 59(3), pages 413-436.
    4. Burguet, Roberto & Caminal, Ramon & Matutes, Carmen, 2002. "Golden cages for showy birds: Optimal switching costs in labor contracts," European Economic Review, Elsevier, vol. 46(7), pages 1153-1185, July.
    5. repec:pri:indrel:dsp011j92g746j is not listed on IDEAS
    6. Schmitz, Patrick W., 2004. "Job protection laws and agency problems under asymmetric information," European Economic Review, Elsevier, vol. 48(5), pages 1027-1046, October.
    7. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    8. Niko Matouschek, 2004. "Ex Post Inefficiencies in a Property Rights Theory of the Firm," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 125-147, April.
    9. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
    10. Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, vol. 122(1), pages 60-99, May.
    11. Moen, Espen R & Rosén, Åsa, 2006. "Incentives in Competitive Search Equilibrium and Wage Rigidity," CEPR Discussion Papers 5554, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Karabay, Bilgehan & McLaren, John, 2011. "Pareto-improving firing costs?," European Economic Review, Elsevier, vol. 55(8), pages 1083-1093.
    2. Sabine Klinger & Thomas Rothe, 2012. "The Impact of Labour Market Reforms and Economic Performance on the Matching of the Short‐term and the Long‐term Unemployed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(1), pages 90-114, February.
    3. Poilly, Céline & Wesselbaum, Dennis, 2014. "Evaluating labor market reforms: A normative analysis," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 156-170.

    More about this item

    Keywords

    search; bargaining; asymmetric information; labor market reform;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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