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(In)efficient Separations, Firing Costs and Temporary Contracts

Author

Listed:
  • Andrea Gerali

    (Bank of Italy)

  • Elisa Guglielminetti

    (Bank of Italy)

  • Danilo Liberati

    (Bank of Italy)

Abstract

In this paper we study the allocative (in)efficiency of employment protection in relation to firing costs, in a general equilibrium model with labor market frictions. The optimal firing costs depend on the level of unemployment benefits and the degree of centralized wage bargaining, two features of the labor market that induce downward wage rigidity and trigger inefficient employment separations. When restrictions on firing employees with permanent contracts are inefficiently high, the introduction of temporary contracts improves welfare but does not fully restore efficiency. A quantitative analysis for the Italian economy shows that the firing costs before the recent labor market reforms were 30% higher than the optimal level, implying a consumption loss of almost 2% in the steady state. The introduction of fixed-term jobs in the early 2000’s closed one fourth of the gap between inefficient and efficient allocation, although it led to higher unemployment rates and turnover.

Suggested Citation

  • Andrea Gerali & Elisa Guglielminetti & Danilo Liberati, 2021. "(In)efficient Separations, Firing Costs and Temporary Contracts," Temi di discussione (Economic working papers) 1330, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1330_21
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2021/2021-1330/en_tema_1330.pdf
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    References listed on IDEAS

    as
    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).
    2. Albertini, Julien & Fairise, Xavier, 2013. "Search frictions, real wage rigidities and the optimal design of unemployment insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1796-1813.
    3. Michèle Belot & Philipp Kircher & Paul Muller, 2022. "How Wage Announcements Affect Job Search—A Field Experiment," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 1-67, October.
    4. AlShehabi, Omar Hesham, 2015. "The importance of firing costs and the Hosios condition in search models with endogenous job destruction," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 285-299.
    5. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 25(1), pages 40-59, Spring.
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    More about this item

    Keywords

    employment protection; temporary contracts; labor market institutions; structural reforms; general equilibrium model; search and matching;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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