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Education and the Welfare Gains from Employment Protection

  • Charlot, Olivier


    (University of Cergy-Pontoise)

  • Malherbet, Franck


    (University of Rouen)

This paper studies the impact of an European-like labor market regulation on the return to schooling, equilibrium unemployment and welfare. We show that firing costs and temporary employment have opposite effects on educational choices. We furthermore demonstrate that a laissez faire economy with no regulation is inefficient as it is characterized by insufficient educational investments leading to excess job destruction and inadequate job creation. By stabilizing employment relationships, firing costs may spur educational investments and therefore lead to welfare and productivity gains, though a first-best policy would be to subsidize education. However, there is little chance for a dual labor market, as is common in many European countries, with heavily regulated long-term contracts and more flexible short-term contracts to raise the incentives to schooling and aggregate welfare.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4799.

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Length: 45 pages
Date of creation: Mar 2010
Date of revision:
Publication status: published as 'Education and Employment Protection' in: Labour Economics, 2013, 20, 3-23
Handle: RePEc:iza:izadps:dp4799
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