Working Paper: CEPR ID: DP15453
Authors: Juan J. Dolado; Etienne Lale; Nawid Siassi
Abstract: Three features of real-life reforms of dual employment protection legislation (EPL) systemsnare particularly hard to study through the lens of standard labour-market search models: (i) the excess job turnover implied by dual EPL, (ii) the non-retroactive nature of EPL reforms, and (iii) the transition dynamics from dual to a unified EPL system. In this paper we develop a computationally tractable model addressing these issues. Our main finding is that the welfare gains of reforming a dual EPL system are sizeable and achieved mostly through a decrease in turnover at short job tenures. This conclusion continues to hold in more general settings featuring wage rigidities, heterogeneity in productivity upon matching,and human capital accumulation. We also find substantial cross-sectional heterogeneity inwelfare effects along the transition to a unified EPL scheme. Given that the model iscalibrated to data from Spain, often considered as the epitome of a labour market with dualEPL, our results should provide guidance for a wide range of reforms of dual EPL systems.
Keywords: employment protection; dualism; labour market reform
JEL Codes: E24; J63; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transitioning from dual to unified employment protection legislation (EPL) (J53) | welfare gains (D69) |
| Reduction in job turnover at short job tenures (J63) | welfare gains (D69) |
| Reduction in separation rate by approximately 15-20% (C21) | Reduction in job turnover at short job tenures (J63) |
| welfare gains (D69) | Concentration among labor market outsiders (J69) |
| Young workers gain an average of 12% in welfare (J31) | welfare gains for labor market outsiders (J68) |
| Older workers face an average consumption reduction of 0.8% (J26) | welfare losses for long-tenured workers (J32) |