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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, unemployment benefits are unambiguously 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: http://www3.eeg.uminho.pt/economia/nipe/docs/2012/NIPE_WP_03_2012.pdf
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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 3/2012.

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Date of creation: 2012
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Handle: RePEc:nip:nipewp:03/2012
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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  1. 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.
  2. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2006. "The Political Economy of Flexicurity," Working Papers 2006-15, FEDEA.
  3. 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).
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  8. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2012. "North–South technology transfer in unionised multinationals," Journal of Development Economics, Elsevier, vol. 99(2), pages 385-395.
  9. 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.
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  16. 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.
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  18. Richard B. Freeman, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer.
  19. Giulio Piccirilli, 2010. "Job protection, industrial relations, and employment," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 803-824, October.
  20. 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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  22. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  23. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  24. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
  25. Raj Chetty, 2005. "A General Formula for the Optimal Level of Social Insurance," NBER Working Papers 11386, National Bureau of Economic Research, Inc.
  26. 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.
  27. Ulph, Alistair & Ulph, David, 1998. "Labour markets, bargaining and innovation," European Economic Review, Elsevier, vol. 42(3-5), pages 931-939, May.
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