Flexibility at the Margin and Labor Market Volatility in OECD Countries

Hector Sala, José Silva and Manuel Toledo

No 3293, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study whether segmented labor markets with flexibility at the margin (e.g., just affecting fixed-term employees) can achieve similar volatility than fully deregulated labor markets. Flexibility at the margin produces a gap in separation costs among matched workers that cause fixed-term employment to be the main workforce adjustment device, which in turn increases de labor market volatility. This increased volatility is partially reverted when limitations in the duration and number of renewals of fixed-term contracts are introduced. Under this scenario, firms respond by reducing the intensity of job destruction since it becomes more difficult to avoid firing costs in permanents contracts. We present a matching model with temporary and permanent jobs where (i) the gap in firing costs and (ii) restrictions in the use of fixed-term contracts helps explain the similar volatility observed in many regulated OECD labor markets with flexibility at the margin vis-à-vis the fully deregulated ones.

Keywords: volatility; matching model; flexibility at the margin; separation costs (search for similar items in EconPapers)
JEL-codes: J23 J41 J63 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2008-01
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published - published in: Scandinavian Journal of Economics, 2012, 114 (3), 991-1017

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Related works:
Journal Article: Flexibility at the Margin and Labor Market Volatility in OECD Countries (2012)
Working Paper: Flexibility at the margin and labor market volatility in OECD countries (2007)
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