On the Efficiency of Job and Income Protection in the Dynamic Labour Markets

This paper investigates the efficiency implications of two kinds of worker protection, namely job security and income protection. Both of them have important aggregate efficiency effects in the dynamic labour markets, where worker mobility is costly. In the absence of firing costs, income security has ambiguous effect on production efficiency. If mobility costs are very high, dynamic costs associated to reallocation outweighs a gain from static efficiency as more jobs are created into high productivity sector, but need to reallocated always when the sector is hit by a negative productivity shock. On the contrary, if mobility costs are low a static efficiency outweighs a dynamic costs associated to reallocation. Employment protection is also more costly in terms of productive efficiency, more it involves wasted administrative and red- tape costs for the firms.