Working Paper: CEPR ID: DP11030
Authors: Juan J. Dolado; Etienne Lal; Nawid Siassi
Abstract: This paper analyses the optimal design of a single open-ended contract (SOEC) and studies the political economy of moving towards such a SOEC in a labour market with dual employment protection. We develop a computationally tractable approach to compare two economic environments: one with flexible entry-level jobs and high employment protection at longer tenures, and another one with a SOEC featuring employment protection levels that increase smoothly with tenure. For illustrative purposes, we specialise the discussion of such choices to Spain, a country often considered as an epitome of a dual labour market. We show that a SOEC has the potential of bringing substantial improvements in equilibrium allocations and welfare. We provide estimates for the eligibility rule and tenure profile of the optimal SOEC, defined as the contract maximising the steady-state lifetime utility of new labour-market entrants. Finally, we use the model to identify winners and losers among younger and older workers in the transitional path of such a reform, and evaluate its political support.
Keywords: Dualism; Employment Protection; Labour Market Reform; Single Contract
JEL Codes: H29; J33; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of a SOEC (Y20) | improvements in equilibrium allocations (D51) |
| introduction of a SOEC (Y20) | welfare improvements for new labor market entrants (J68) |
| introduction of a SOEC (Y20) | welfare gain for current generation of workers (J32) |
| young workers (J29) | welfare increase due to SOEC (I38) |
| older workers (J26) | welfare decrease due to SOEC (I38) |
| SOEC implementation (L17) | reduction of job destruction rates for short-tenured jobs (J63) |
| SOEC implementation (L17) | increase in job creation (J23) |
| SOEC implementation (L17) | shorter unemployment spells among young workers (J65) |
| SOEC implementation (L17) | decrease in unemployment insurance payroll tax (J65) |