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Labor Market Frictions, Job Insecurity, and the Flexibility of the Employment Relationship

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  • Niko Matouschek
  • Paolo Ramezzana

Abstract

We analyze a search model of the labor market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labor market frictions induces more aggressive wage bargaining behavior which in turn leads to a costly increase in job insecurity. This adverse insecurity effect can be so large that firms and workers who are in an employment relationship can be made worse off by a fall in labor market frictions. In contrast, firms and workers who are not in an employment relationship and are searching the market for a counterpart are always made better off by such a fall in labor market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labor market frictions induces a one off reorganization in which firms and workers switch from a rigid employment relationship to a flexible one. This reorganization leads to a large, one off increase in job insecurity and unemployment

Suggested Citation

  • Niko Matouschek & Paolo Ramezzana, 2004. "Labor Market Frictions, Job Insecurity, and the Flexibility of the Employment Relationship," Econometric Society 2004 North American Summer Meetings 28, Econometric Society.
    • Handle: RePEc:ecm:nasm04:28
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    References listed on IDEAS

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    More about this item

    Keywords

    job insecurity; flexibility of employment relationships; private information;
    All these keywords.

    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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