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Employment Protection Legislation and Adverse Selection at the Labor Market Entry

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  • Anne Bucher
  • Sébastien Ménard

Abstract

This paper investigates how the labor market institutions that characterize most of the Euro- pean countries a®ect the integration process of younger workers on the labor market. We argue that young workers have private information about their abilities when entering the labor mar- ket. However, this information asymmetry does not prevail as the production process reveals the worker's type. Adverse selection distorts hiring practices at the labor market entry. We develop a dynamic principal-agent model and ¯rst derive the optimal menu of labor contracts employers can use as a self-selection mechanism. Firms o®er an increasing wage to high-productive workers while a °atter wage pro¯le to low-productive workers. Our theory suggests that a high level of ¯ring costs as well as the presence of a minimum wage prevent employers from o®ering separating contracts to new entrants and thus contribute to the time-consuming integration process of youth. Finally, we provide numerical exercises to illustrate our theoretical ¯ndings on the optimal wage pro¯le and to assess the consequences for employment opportunities.
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Suggested Citation

  • Anne Bucher & Sébastien Ménard, 2010. "Employment Protection Legislation and Adverse Selection at the Labor Market Entry," TEPP Working Paper 2010-21, TEPP.
    • Handle: RePEc:tep:teppwp:wp10-21
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    References listed on IDEAS

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