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Employment protection reform in European labor markets: the collective bargaining regime matters

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  • Francesco De Palma
  • Yann Thommen

Abstract

Policy advisers repeatedly call on Western European countries to reform their employment protection legislation (EPL) by adopting layoff taxes to finance unemployment insurance (UI). This new design, partly based on the existing "experience-rating" (ER) system in the U.S., would induce firms to internalize layoff fiscal costs and hence reduce unemployment. Its success remains uncertain in economies with a collective wage-setting system, as in many Western European countries. Using a matching model with endogenous job destruction, we provide an ex-ante evaluation of this policy reform’s effects on labor market outcomes in a firm-level bargaining economy and a sector-level bargaining one. Using numerical exercises, we show that compared to a scenario of a simple increase in EPL stringency, the implementation of an ER system results in a decrease in unemployment under both bargaining regimes. Because of the possibility for firms to adjust most terms and conditions of employment (including wage) in decentralized negotiations, juxtaposing the ER system with the existing EPL yields the best labor market performance under a firm-level bargaining regime. The lack of internal flexibility in sector-level bargaining calls for accompanying the implementation of the ER with a relaxation of the existing EPL’s stringency. Lastly, we show that in industries with a turbulent economic environment, accompanying the introduction of ER while reducing the existing EPL’s strictness is recommended.

Suggested Citation

  • Francesco De Palma & Yann Thommen, 2019. "Employment protection reform in European labor markets: the collective bargaining regime matters," Working Papers of BETA 2019-16, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  • Handle: RePEc:ulp:sbbeta:2019-16
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    1. Employment protection reform in European labor markets: the collective bargaining regime matters.
      by Christian Zimmermann in NEP-DGE blog on 2019-05-30 22:26:26

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    More about this item

    Keywords

    Search and matching models; Collective bargaining; Experience rating; Employment protection.;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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