Mounting evidence suggests that excessive job protection reduces employment and labor market flows, hinders technological innovations, pushes workers into the informal sector, and hurts vulnerable ...groups by depriving them of job opportunities. Flexible labor markets stimulate job creation, investment, and growth, but they create job insecurity and displace some workers. How can the costs of such insecurity and displacements be minimized while ensuring that the labor market remains flexible? Each of the main unemployment income support systems (unemployment insurance, unemployment assistance, unemployment insurance savings accounts, severance pay, and public works) has strengths and weaknesses. Country-specific conditions—chief among them labor market and other institutions, the capacity to administer each type of system, and the size of the informal sector—determine which system is best suited to developing and transition countries.
This article studies the impact of experience rating on unemployment for skilled and unskilled workers. In this purpose, we build a dual matching model with endogenous job creation, job rejection, ...job destruction and endogeneous taxes aimed at financing the UI system. In this framework, the impact of employment protection differs for skilled and unskilled workers; experience rating may improve the labour market outcomes, and the existence of some undesirable effects depends on the degree of substitution between the experience rating system and existing employment protection schemes. In any case, the potential problems can be alleviated by the induced rise in the return to skill. JEL Classification : I20 ; J20 ; J60.
Traditional models of the labor market assume fixed firing costs. This paper explores the implications of variable firing costs, building this new assumption into a matching model with endogenous job ...destruction. The available evidence on the outcomes of cases brought to labor courts suggests that firing costs are negatively related with labor market tightness. In such a case, we may no longer invoke “rigidities” on labor markets as the cause of their poor performance. Our model yields three interesting results. First, labor markets may have multiple equilibria that cannot be Pareto-ordered; each with its own configuration in terms of average duration of unemployment and filled jobs, as well as employment protection. Second, the variability of firing costs produces a positive externality affecting the stability properties of these equilibria. Finally, the two externalities affect the efficiency of the social optimum, modifying the Hosios Hosios, A.J., 1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57, 279–298 condition. We use these results to interpret the recent history of European unemployment.
Empirical evidence indicates that lay-off costs consist of two elements, namely firing costs and severance payments. This paper investigates business cycle and steady state effects of firing costs ...and severance payments and discusses the differences. We find that severance payments imply a lower volatility of key labor market variables compared with firing costs. Persistently increasing those costs, reduces the welfare in the model economy, but increases employment. The reason for the different performance is the impact on the wage and the additional stimulus caused by severance payments. The social planner therefore faces a trade-off in the design of employment protection. Furthermore, the appropriate design of lay-off costs also has strong implications for the design of other elements of employment protection.
Empirical evidence indicates that lay-off costs consist of two elements, namely firing costs and severance payments. This paper investigates business cycle and steady state effects of firing costs ...and severance payments and discusses the differences. We find that severance payments imply a lower volatility of key labor market variables compared with firing costs. Persistently increasing those costs, reduces the welfare in the model economy but increases employment. The reason for the different performance is the impact on the wage and the additional stimulus caused by severance payments. The social planner therefore faces a trade-off in the design of employment protection. Furthermore, the design of lay-off costs also has strong implications for the design of other elements of employment protection
In many countries, Employment Protection Legislation (EPL) establishes less strict dismissal procedures for specific groups of workers. This paper builds a simple matching model with heterogeneous ...workers in order to analyze this feature of EPL. We use the model to analyze the effects of reforms targeted at lowering the firing costs of a particular group of workers, and compare the results with those stemming from a comprehensive reform that reduces firing costs for all workers. The model is calibrated for the Spanish economy, where an important reform of this kind took place in 1997. Overall, our results point out that EPL reforms achieve the largest reduction in unemployment when they are targeted to workers with lower and more volatile productivity.
Within an incomplete-contract framework, we examine the consequences of contract renegotiation for contract design/enforcement and training market efficiency. Specifically, we show how the imposition ...of either firing costs or exit costs can bind together employers and employees in longer-lasting employment relationships that allow both agents to amortize their training investments. Nevertheless, the model implies that, although firing and exit costs provide institutional solutions to the training under-investment problem, this is achieved at the expense of allocative efficiency (efficient separations). Empirical evidence supports the existence of such a trade-off.
Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on ...employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a countervailing fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firing in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.
In this article, we present a model of individual dismissals based on the workers' right to file a suit against their employer arguing that the dismissal is unjustified or unfair. The model is a ...standard pre-trial bargaining game between a firm and a worker. We study two cases: when the law states the severance pay for unfair dismissal (the European case), and when judges can decide freely on the compensation to be paid to the worker (the American case). The model provides some guidelines for Labour Law reforms. In the European case, a decrease in the severance pay for unfair dismissals fixed by law will decrease the severance pay offered by the firm, and only under some assumptions will decrease the expected firing cost and will increase the settlement probability. In addition, the transition from the European to the American case is likely to increase the probability of settlement (and to decrease it in the opposite case) with ambiguous effects on agreed severance pay and expected firing costs. PUBLICATION ABSTRACT
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