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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. Giuseppe Bertola & Richard Rogerson, 1996. "Institutions and Labor Reallocation," NBER Working Papers 5828, National Bureau of Economic Research, Inc.
  2. Bart Cockx & Bruno Van der Linden, 2009. "Flexicurity in Belgium. A Proposal Based on Economic Principles," CESifo Working Paper Series 2655, CESifo Group Munich.
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  5. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics 35596, London School of Economics and Political Science, LSE Library.
  6. Lommerud, Kjell Erik & Meland, Frode & Rune Straume, Odd, 2006. "Globalisation and union opposition to technological change," Journal of International Economics, Elsevier, vol. 68(1), pages 1-23, January.
  7. Michele Belot & Jan Boone & Jan Van Ours, 2007. "Welfare-Improving Employment Protection," Economica, London School of Economics and Political Science, vol. 74(295), pages 381-396, 08.
  8. 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.
  9. Raj Chetty, 2005. "A General Formula for the Optimal Level of Social Insurance," NBER Working Papers 11386, National Bureau of Economic Research, Inc.
  10. 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.
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  12. 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.
  13. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  14. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
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  19. repec:ner:tilbur:urn:nbn:nl:ui:12-194309 is not listed on IDEAS
  20. 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.
  21. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2011. "North-South technology transfer in unionised multinationals," CEPR Discussion Papers 8664, C.E.P.R. Discussion Papers.
  22. Dixit Avinash & Rob Rafael, 1994. "Switching Costs and Sectoral Adjustments in General Equilibrium with Uninsured Risk," Journal of Economic Theory, Elsevier, vol. 62(1), pages 48-69, February.
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  24. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  25. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
  26. 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.
  27. 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.
  28. Karabay, Bilgehan & McLaren, John, 2011. "Pareto-improving firing costs?," European Economic Review, Elsevier, vol. 55(8), pages 1083-1093.
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