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Evaluating Labor Market Reforms: A General Equilibrium Approach

  • César Alonso-Borrego

    ()

    (Department of Economics,Universidad Carlos III de Madrid)

  • Jesús Fernández-Villaverde

    ()

    (Department of Economics, University of Pennsylvania)

  • José E. Galdón-Sánchez

    ()

    (Department of Economics,Universidad Publica 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 fixed term contracts increase unemployment, reduce output, and raise productivity. The welfare effects are ambiguous.

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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 04-016.

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Length: 46 pages
Date of creation: 24 Apr 2004
Date of revision:
Handle: RePEc:pen:papers:04-016
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