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Employment protection and unemployment benefits: on technology adoption and job creation in a matching model

We analyse the effects of different labour market policies — employment protection, unemployment benefits and payroll taxes — on job creation and technology choices in a model where firms are randomly matched with workers of different productivity and wages are determined by ex-post bargaining. In this setting, as long as firing costs remain below a certain level, unemployment benefits are detrimental both to job creation and technology adoption while the effects of employment protection are mixed, as higher firing costs stifle job creation but stimulate technology investments. This suggests that a ‘flexicurity’ policy,with low employment protection and high unemployment benefits, might have the adverse effect of slowing down technological progress and job growth. Indeed, our analysis of the optimal policy solution suggests that flexicurity is often not optimal, and may be optimal only in conjunction with payroll subsidies.

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File URL: https://www.uib.no/filearchive/wp18.12pdf.pdf
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Paper provided by University of Bergen, Department of Economics in its series Working Papers in Economics with number 18/12.

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Length: 33 pages
Date of creation: 07 Dec 2012
Date of revision:
Handle: RePEc:hhs:bergec:2012_018
Contact details of provider: Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Phone: (+47)55589200
Fax: (+47)55589210
Web page: http://www.uib.no/econ/en
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  1. Michele Belot & Jan Boone & Jan van Ours, 2004. "Welfare Improving Employment Protection," DEGIT Conference Papers c009_004, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. B. Cockx & B. Van Der Linden, 2009. "Flexicurity in Belgium A Proposal Based on Economic Principles," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/584, Ghent University, Faculty of Economics and Business Administration.
  3. Kreickemeier, Udo & Nelson, Douglas, 2006. "Fair wages, unemployment and technological change in a global economy," Journal of International Economics, Elsevier, vol. 70(2), pages 451-469, December.
  4. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
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  7. Landais, Camille & Michaillat, Pascal & Saez, Emmanuel, 2010. "Optimal Unemployment Insurance over the Business Cycle," CEPR Discussion Papers 8132, C.E.P.R. Discussion Papers.
  8. Hugo A. Hopenhayn & Juan Pablo Nicolini, 2009. "Optimal Unemployment Insurance and Employment History," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 1049-1070.
  9. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2012. "The Political Economy Of Flexicurity," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 684-715, 08.
  10. Bertola, Giuseppe, 2002. "A Pure Theory of Job Security and Labour Income Risk," CEPR Discussion Papers 3430, C.E.P.R. Discussion Papers.
  11. Kjell Erik Lommerud & Frode Meland & Odd Rune Straume, 2010. "North-South technology transfer in unionised multinationals," NIPE Working Papers 35/2010, NIPE - Universidade do Minho.
  12. Manning, Alan, 1987. "An Integration of Trade Union Models in a Sequential Bargaining Framework," Economic Journal, Royal Economic Society, vol. 97(385), pages 121-39, March.
  13. Richard B. Freeman, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer.
  14. Kjell Lommerud & Frode Meland & Odd Rune Straume, 2004. "Globalisation And Union Opposition To Technological Change," Royal Economic Society Annual Conference 2004 49, Royal Economic Society.
  15. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  16. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
  17. Fernando Alvarez & Marcelo Veracierto, 1999. "Labor market policies in an equilibrium search model," Working Paper Series WP-99-10, Federal Reserve Bank of Chicago.
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  19. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  20. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  21. repec:ner:tilbur:urn:nbn:nl:ui:12-194309 is not listed on IDEAS
  22. Ulph, Alistair & Ulph, David, 1998. "Labour markets, bargaining and innovation," European Economic Review, Elsevier, vol. 42(3-5), pages 931-939, May.
  23. Anesi, Vincent & De Donder, Philippe, 2009. "A Positive Theory of Unemployment Insurance and Employment Protection," CEPR Discussion Papers 7333, C.E.P.R. Discussion Papers.
  24. Karabay, Bilgehan & McLaren, John, 2011. "Pareto-improving firing costs?," European Economic Review, Elsevier, vol. 55(8), pages 1083-1093.
  25. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  26. Marc Blatter & Samuel Muehlemann & Samuel Schenker, 2008. "The Costs of Hiring Skilled Workers," Economics of Education Working Paper Series 0015, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Nov 2009.
  27. Giulio Piccirilli, 2010. "Job protection, industrial relations, and employment," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 803-824, October.
  28. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
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