Working Paper: CEPR ID: DP4193
Authors: Niko Matouschek; Paolo Ramezzana; Frdric Robert-Nicoud
Abstract: We analyse a search model of the labour market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labour market frictions induces more aggressive wage bargaining behaviour, which in turn leads to a costly increase in job insecurity. This adverse insecurity effect can be so large that firms and workers who are in an employment relationship can be made worse off by a fall in labour market frictions. In contrast, firms and workers who are not in an employment relationship and are searching the market for a counterpart are always made better off by such a fall in labour market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labour market frictions induces a one-off reorganization in which firms and workers switch from a rigid employment relationship to a flexible one. This reorganization leads to a large, one-off increase in job insecurity and unemployment.
Keywords: flexibility of employment relationships; job insecurity; private information
JEL Codes: D82; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decrease in labor market frictions (J69) | more aggressive wage bargaining (J52) |
| more aggressive wage bargaining (J52) | increase in job insecurity (J63) |
| decrease in labor market frictions (J69) | increase in job insecurity (J63) |