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Job-Specific Investment and the Cost of Dismissal Restrictions; The Case of Portugal

  • H. Takizawa
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    Using a search and matching labor market equilibrium model, this paper quantifies lost labor productivity and consumption per worker that emerges from the restrictions on dismissals. Dismissal restrictions hamper the efficient reallocation of workers, with workers remaining longer in jobs. But the restrictions also tend to induce job-specific investments. A calibration exercise applied to Portugal suggests that the restrictions on dismissal slow the pace of worker reallocation and cause substantial losses of labor productivity and consumption. Although lower worker mobility induces job-specific investment that offsets part of the labor productivity and consumption losses, the size of this offsetting effect is, at most, modest.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16422
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/75.

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    Length: 29
    Date of creation: 01 Apr 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/75
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    1. Dale T. Mortensen & Christopher A. Pissarides, 1999. "Job Reallocation, Employment Fluctuations and Unemployment," CEP Discussion Papers dp0421, Centre for Economic Performance, LSE.
    2. van Ours, J. C., 1991. "The Efficiency of the Dutch Labour Market in Matching Unemployment and Vacancies," Other publications TiSEM 4bbea82e-68fb-45e0-b32a-3, Tilburg University, School of Economics and Management.
    3. Olympia Bover & Pilar García-Perea & Pedro Portugal, 2000. "Labour market outliers: Lessons from Portugal and Spain," Economic Policy, CEPR;CES;MSH, vol. 15(31), pages 379-428, October.
    4. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    5. Hogan, Seamus & Ragan, Christopher, 1998. "Job security with equilibrium unemployment," Labour Economics, Elsevier, vol. 5(2), pages 185-185, June.
    6. Belot, M.V.K. & Boone, J. & van Ours, J.C., 2002. "Welfare Effects of Employment Protection," Discussion Paper 2002-48, Tilburg University, Center for Economic Research.
    7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
    8. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
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