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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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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. 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.
  2. 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.
  3. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2005. "Globalisation and union opposition to technological change," Working Papers in Economics 01/05, University of Bergen, Department of Economics.
  4. Richard B. Freeman, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer.
  5. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
  6. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2013. "Optimal Unemployment Insurance over the Business Cycle," Discussion Papers 1303, Centre for Macroeconomics (CFM).
  7. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  8. 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.
  9. Giulio Piccirilli, 2010. "Job protection, industrial relations, and employment," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 803-824, October.
  10. Cockx, Bart & Van der Linden, Bruno, 2009. "Flexicurity in Belgium: A Proposal Based on Economic Principles," IZA Policy Papers 9, Institute for the Study of Labor (IZA).
  11. Giuseppe Bertola & Richard Rogerson, 1996. "Institutions and Labor Reallocation," NBER Working Papers 5828, National Bureau of Economic Research, Inc.
  12. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  13. Fernando Alvarez & Marcelo Veracierto, 1999. "Labor market policies in an equilibrium search model," Working Paper Series WP-99-10, Federal Reserve Bank of Chicago.
  14. 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.
  15. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2006. "The Political Economy of Flexicurity," Working Papers 2006-15, FEDEA.
  16. Ulph, Alistair & Ulph, David, 1998. "Labour markets, bargaining and innovation," European Economic Review, Elsevier, vol. 42(3-5), pages 931-939, May.
  17. 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.
  18. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  19. 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.
  20. Michele Belot & Jan Boone & Jan van Ours, 2004. "Welfare Improving Employment Protection," DEGIT Conference Papers c009_004, DEGIT, Dynamics, Economic Growth, and International Trade.
  21. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
  22. Karabay, Bilgehan & McLaren, John, 2011. "Pareto-improving firing costs?," European Economic Review, Elsevier, vol. 55(8), pages 1083-1093.
  23. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 43-61.
  24. 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.
  25. 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.
  26. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
  27. repec:oup:restud:v:76:y:2009:i:3:p:1049-1070 is not listed on IDEAS
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