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

Matouschek, Niko, Ramezzana, Paolo and Robert-Nicoud, Frédéric (2008) Labor market reforms, job instability, and the flexibility of the employment relationship. CEPDP (865). London School of Economics and Political Science. Centre for Economic Performance, London, UK. ISBN 9780853282617

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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.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk
Additional Information:	© 2008 the authors
Divisions:	Centre for Economic Performance Geography & Environment
Subjects:	H Social Sciences > HD Industries. Land use. Labor
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets
Date Deposited:	17 Jul 2008 13:57
Last Modified:	13 Sep 2024 20:06
URI:	http://eprints.lse.ac.uk/id/eprint/19599

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