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Evaluating Labor Market Reforms: A General Equilibrium Approach

  • Alonso-Borrego, César

    ()

    (Universidad Carlos III de Madrid)

  • Fernández-Villaverde, Jesús

    ()

    (University of Pennsylvania)

  • Galdon-Sanchez, Jose Enrique

    ()

    (Universidad Pública de Navarra)

Job security provisions are commonly invoked to explain the high and persistent European unemployment rates. This belief has led several countries to reform their labor markets and liberalize the use of fixed-term contracts. Despite how common such contracts have become after deregulation, there is a lack of quantitative analysis of their impact on the economy. To fill this gap, we build a general equilibrium model with heterogeneous agents and firing costs in the tradition of Hopenhayn and Rogerson (1993). We calibrate our model to Spanish data, choosing in part parameters estimated with firm-level longitudinal data. Spain is particularly interesting, since its labor regulations are among the most protective in the OECD, and both its unemployment and its share of fixed-term employment are the highest. We find that fixedterm contracts increase unemployment, reduce output, and raise productivity. The welfare effects are ambiguous.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1129.

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Length: 46 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1129
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  1. Maia Güell, 2003. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 18, Barcelona Graduate School of Economics.
  2. Victoria Osuna Padilla, 2004. "The Effects of Reducing Firing Costs in Spain: a Lost Opportunity?," Economic Working Papers at Centro de Estudios Andaluces E2004/18, Centro de Estudios Andaluces.
  3. Etienne Wasmer, 1997. "Competition for Jobs in a Growing Economy and the Emergence of Dualism," Working Papers 97-15, Centre de Recherche en Economie et Statistique.
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  5. Dominique Goux & Eric Maurin & Marianne Pauchet, 1999. "Fixed-term Contracts and the Dynamics of Labour Demand," Working Papers 99-02, Centre de Recherche en Economie et Statistique.
  6. Alison L. Booth & Marco Francesconi & Jeff Frank, 2002. "Temporary Jobs: Stepping Stones Or Dead Ends?," Economic Journal, Royal Economic Society, vol. 112(480), pages F189-F213, June.
  7. Victor Aguirregabiria & Cesar Alonso-Borrego, 2014. "Labor Contracts And Flexibility: Evidence From A Labor Market Reform In Spain," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 930-957, 04.
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  9. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  10. Giuseppe Bertola & Richard Rogerson, 1996. "Institutions and Labor Reallocation," NBER Working Papers 5828, National Bureau of Economic Research, Inc.
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  12. Cesar Alonso-Borrego & Jesus Fernandez-Villaverde & Jose E. Galdon-Sanchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," Working Papers 10, Princeton University, Department of Economics, Industrial Relations Section..
  13. Francis Kramarz & Marie-Laure Michaud, 2002. "The Shape of Hiring and Separation Costs," Working Papers 2002-38, Centre de Recherche en Economie et Statistique.
  14. Cahuc, Pierre & Postel-Vinay, Fabien, 2001. "Temporary Jobs, Employment Protection and Labor Market Performance," IZA Discussion Papers 260, Institute for the Study of Labor (IZA).
  15. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
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  17. Cabrales, Antonio & Hopenhayn, Hugo A., 1997. "Labor-market flexibility and aggregate employment volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 189-228, June.
  18. 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.
  19. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
  20. 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.
  21. 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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  24. Olivier Blanchard & Augustin Landier, 2001. "The Perverse Effects of Partial Labor Market Reform: Fixed Duration Contracts in France," NBER Working Papers 8219, National Bureau of Economic Research, Inc.
  25. Juan F. Jimeno & Luis Toharia, 1993. "The effects of fixed-term employment on wages: theory and evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 475-494, September.
  26. repec:pri:indrel:dsp011j92g746j is not listed on IDEAS
  27. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  28. Marcelo Veracierto, 2000. "What are the short-run effects of increasing labor market flexibility?," Working Paper Series WP-00-29, Federal Reserve Bank of Chicago.
  29. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
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  31. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  32. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
  33. Carlos Díaz-Moreno & José E. Galdón-Sánchez, 1999. "How important is firm behavior to understand unemployment? Evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 23(2), pages 203-224, May.
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  36. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, vol. 36(5), pages 1013-1047, June.
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