Do labor market conditions affect the strictness of employment protection legislation?
Abstract —Do Labor Market Conditions Affect the Strictness of Employment Protection Legislation?
In this paper the authors provide a theoretical microfoundation for the negative relationship between firing costs and labor market tightness and evaluate the effects of this relationship on labor market performance in a matching model à la Mortensen and Pissarides (1994). The optimal level of firing costs are chosen by the employed worker — i.e. the insider — which is the median voter, by maximizing her human capital. Performing a comparative statics exercise, they analyze the effects of labor market tightness on the optimal choice of firing costs. The results are clear cut and generalize our previous work. (a) If wages do not depend on firing costs a decreasing firing costs function unambiguously arises. (b) With flexible wages, a sufficient condition to have a decreasing relationship is that the separation rate be higher than the hiring rate. These results are illustrated with a numerical simulation. Moreover, the results show that the relationship between labor market tightness and firing costs can give rise to a labor market configuration characterized by multiple equilibria: prolonged average duration of unemployment will produce a labor market with low flows and wage and high strictness of employment protection, and vice versa.
- Author(s)
- Enrico Saltari, Riccardo Tilli
- Year of publication
- March, 2008
- Journal
- Economics Bulletin
- Volume, Number
- 10, 4
- Pages
- 1-9
- Publisher
- Economics Bulletin
- Language
- English