Working Paper: CEPR ID: DP596
Authors: Samuel Bentolila; Gilles Saint-Paul
Abstract: This paper constructs a theoretical model to study the effects on employment of the introduction of flexible labour contracts (i.e. with low firing costs), which occurred in many European countries in the 1980s, which it then tests on Spanish data. The model predicts that such contracts increase the size of the employment response to aggregate shocks, while decreasing its persistence, and that employment overshoots its long-run level at the time these contracts are introduced. Econometric estimates of labour demand based on a panel of large Spanish industrial firms are consistent with several of the model's implications, in particular the increase in the cyclical response of employment.
Keywords: unemployment; flexibility; labour markets; firing costs; europe; business cycle; panel data; persistence; overshooting
JEL Codes: C81; E24; J21; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of flexible contracts (D86) | employment persistence (J63) |
| introduction of flexible contracts (D86) | average employment (J20) |
| introduction of flexible contracts (D86) | cyclical response of employment to aggregate shocks (E24) |
| introduction of flexible contracts (J41) | employment overshooting its long-run level (J23) |