Employment Protection in Dual Labor Markets: Any Amplification of Macroeconomic Shocks?

Benjamin Lochner

The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 1, 249-304

Abstract: This paper studies the effects of labor market duality in terms of employment legislation protection (EPL) on labor market volatilities. Modeling contractual heterogeneity through a gap in EPL of temporary and permanent workers (weakly protected temporary/highly protected permanent contracts), I simulate both supply and demand shocks in a New Keynesian model with unemployment. I find that unemployment fluctuations follow an inverted U-shape over the magnitude of the EPL gap: small EPL gaps amplify, while large EPL gaps dampen the reaction of unemployment. In a subsequent empirical analysis, I find that the model’s predictions are consistent with panel data for a large set of OECD countries. Uncovering the non-linear course of unemployment volatility helps reconcile previous divergent research results.

Keywords: dual labor market; employment protection; firing costs; unemployment (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 J23 J41 J63 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejm-2023-0044

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