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Labor Market Performance and Flexibility: Which Comes First?

Author

Listed:
  • Saltari Enrico

    (University of Rome La Sapienza. Italy)

  • Tilli Riccardo

    (University of Rome La Sapienza. Italy)

Abstract

We use a matching framework to explore the hypothesis that firing costs are a decreasing function of labor market tightness. Conventional wisdom suggests that differences in employment protection legislation (EPL) cause differences in labor market performance. Our hypothesis suggests a reverse causality nexus: it is labor market tightness which causes labor market rigidities. The endogeneity of firing costs produces a positive externality. We show that if this externality offsets the standard search externality, the model generates multiple equilibria. which reflect a trade off between wage moderation and the strictness of EPL. We demonstrate that the equilibria are not Pareto ranked. The analysis of local stability shows that, when firing costs externality offsets the search cost externality, the equilibrium is a stable node; vice versa, the equilibrium is an unstable saddle point. Finally, we investigate the question of social efficiency, obtaining a generalization of the Hosios (1990) condition.

Suggested Citation

  • Saltari Enrico & Tilli Riccardo, 2004. "Labor Market Performance and Flexibility: Which Comes First?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-25, March.
    • Handle: RePEc:bpj:bejmac:v:topics.4:y:2004:i:1:n:5
    DOI: 10.2202/1534-5998.1174
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    Citations

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    Cited by:

    1. Chia-hui Lu, 2020. "Labor participation externalities and unemployment," Economics Bulletin, AccessEcon, vol. 40(2), pages 1002-1010.
    2. Saltari, Enrico & Tilli, Riccardo, 2011. "Firing costs and labor market tightness: Is there any relationship?," Research in Economics, Elsevier, vol. 65(1), pages 1-4, March.
    3. Riccardo Tilli & Enrico Saltari, 2008. "Do labor market conditions affect the strictness of employment protection legislation?," Economics Bulletin, AccessEcon, vol. 10(4), pages 1-9.
    4. Riccardo Tilli, 2015. "High speed and low speed structural reforms in the italian goods and labor market," QUADERNI DI ECONOMIA DEL LAVORO, FrancoAngeli Editore, vol. 2015(103), pages 67-82.
    5. Saltari, Enrico & Tilli, Riccardo, 2009. "The role and significance of endogenous firing costs in a matching model with endogenous job destruction," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(5), pages 799-808, October.
    6. repec:ebl:ecbull:v:10:y:2008:i:4:p:1-9 is not listed on IDEAS

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