Working Paper: CEPR ID: DP5033
Authors: Juan José Dolado; Marcel Jansen; Juan F. Jimeno
Abstract: In many countries, Employment Protection Legislation (EPL) establishes different regulations for certain groups of workers who face more disadvantages in the labour market (young workers, women, unskilled workers, etc.) with the aim of improving their employability. Well-known examples are the introduction of atypical employment contracts (e.g. temporary and determined-duration contracts), which ease firing restrictions for some, but not all, workers.This paper discusses the effects of EPL varying among workers of different skills on the level and composition of unemployment, job flows, productivity and welfare. By using an extension of Mortensen-Pissarides? (1994) search model where heterogeneous workers compete for the same jobs, we are able to identify several key channels through which changing firing costs for some groups of workers affects hiring and firing of all workers and, hence, may have a different impact on aggregate labour market variables than reducing firing costs across the board. Some analytical and simulation results also show that these effects of differentiated firing costs by workers? skills may be different depending upon the initial state of the labour market.
Keywords: firing costs; matching; unemployment
JEL Codes: J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| targeted reductions in firing costs for low-skilled workers (J32) | higher welfare gains (D69) |
| targeted reductions in firing costs for low-skilled workers (J32) | overall labor market tightness (J20) |
| targeted reductions in firing costs for low-skilled workers (J32) | job flows (J62) |
| initial state of the labor market (J49) | effects on unemployment rates and welfare of targeted reductions (J65) |
| elasticity of the matching function (J29) | effects on unemployment rates and welfare of targeted reductions (J65) |
| distribution of shocks across workers (D39) | effects on unemployment rates and welfare of targeted reductions (J65) |
| changing firing costs for certain groups of workers (J32) | affect hiring and firing decisions for all workers (J63) |