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Labor market reforms, job instability, and the flexibility of the employment relationship

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  • Matouschek, Niko
  • Ramezzana, Paolo
  • Robert-Nicoud, Frédéric

Abstract

We endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.

Suggested Citation

  • Matouschek, Niko & Ramezzana, Paolo & Robert-Nicoud, Frédéric, 2009. "Labor market reforms, job instability, and the flexibility of the employment relationship," European Economic Review, Elsevier, vol. 53(1), pages 19-36, January.
    • Handle: RePEc:eee:eecrev:v:53:y:2009:i:1:p:19-36
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    1. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute of Labor Economics (IZA).
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    4. Matouschek, Niko & Ramezzana, Paolo & Robert-Nicoud, Frédéric, 2004. "Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship," CEPR Discussion Papers 4193, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Karabay, Bilgehan & McLaren, John, 2011. "Pareto-improving firing costs?," European Economic Review, Elsevier, vol. 55(8), pages 1083-1093.
    2. MacLeod, W. Bentley, 2011. "Great Expectations: Law, Employment Contracts, and Labor Market Performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 18, pages 1591-1696, Elsevier.
    3. Sabine Klinger & Thomas Rothe, 2012. "The Impact of Labour Market Reforms and Economic Performance on the Matching of the Short‐term and the Long‐term Unemployed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(1), pages 90-114, February.
    4. Andriy Zapechelnyuk & Ro’i Zultan, 2020. "Job search costs and incentives," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 181-202, October.
    5. Gratiela Georgiana Carica, 2011. "A Framework Analysis Of European Labour Market Policies," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3(1), pages 13-21, March.
    6. Poilly, Céline & Wesselbaum, Dennis, 2014. "Evaluating labor market reforms: A normative analysis," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 156-170.

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    More about this item

    Keywords

    Search Bargaining Asymmetric information Labor market reform;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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