The General Equilibrium Effects of Labor Market Institutions (joint withAndrea Gerali and Danilo Liberati)
Abstract:
Labor market institutions (LMI s) are key determinants of the equilibrium unemployment rate but the specif ic impact of each of them is often unclear. In this paper we study the inte raction of four different LMIs: i) employment protection on regular contrac ts (EPR), ii) employment protection on temporary contracts (EPT), iii) coll ective bargaining coverage (CBC) and iv) unemployment benefits replacement rate (RR). Cross-country stylized facts show that LMIs interact in a non tr ivial way, pushing up unemployment when imposing restrictions on the adjust ment of both heads and wages. Strong EPR is associated with higher unemploy ment only when extensive CBC or high RR limit firms' ability to adjust wage s downwards. The effects of partial reforms easing employment protection by the introduction of temporary contracts are ambiguous. To rationalize thes e findings we build a DSGE model with labor market frictions which embeds t he previous LMIs. Firms may stipulate regular and temporary contracts in se gmented markets. The first ones are subject to firing costs in case of endo genous separation, while the latter have limited duration and can be endoge nously converted into permanent jobs at expiration. CBC prevents the wage t o fully adjust to idiosyncratic productivity shocks, increasing the probabi lity of separation and inducing firms to substitute regular with temporary jobs. In line with the data the model predicts that the effects of each LMI on equilibrium output and employment depend on the degree of flexibility o f the overall institutional context.
DTSTAMP:20260405T192553Z DTSTART:20190312T130000Z DTEND:20190312T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR