Do labor market conditions affect the strictness of employment protection legislation?

Riccardo Tilli () and Enrico Saltari ()
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Riccardo Tilli: Department of Public Economics - Sapienza - University of Rome
Enrico Saltari: Department of Public Economics - Sapienza - University of Rome

Economics Bulletin, 2008, vol. 10, issue 4, pages 1-9

Abstract: We provide a theoretical microfoundation for the negative relationship between firing costs and labor market tightness and its effects on labor market performance. The optimal level of firing costs is chosen by the employed worker -- i.e. the insider -- by maximizing her human capital. Performing a comparative statics exercise, we analyze the effects of labor market tightness on the optimal choice of firing costs. The results are clear cut and allow to obtain a decreasing firing costs function in the labor market tightness. Moreover, we show that this negative relationship can give rise to a labor market configuration characterized by multiple equilibria: prolonged average duration of unemployment will produce a labor market with low flows and high strictness of employment protection, and vice versa.

Keywords: Matching Models; Firing Costs; Multiple Equilibria (search for similar items in EconPapers)
JEL-codes: J6 J6 (search for similar items in EconPapers)
Date: 2008-03-13
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