Labor market reforms, job instability, and the flexibility of the employment relationship
By: Niko Matouschek, Paolo Ramezzana and Frédéric Robert-Nicoud.
Contributors: Ramezzana, Paolo.; Robert-Nicoud, Frédéric.; London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper -- no. 865
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2008
Place of publication: London
Language: eng
Format: Electronic resource
Description: 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.
Notes: Title from PDF file (viewed on Oct. 10, 2008).

"April 2008."

Includes bibliographical references.

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