Labor Market Performance and Flexibility: Which Comes First?

Enrico Saltari and Riccardo Tilli ()

The B.E. Journal of Macroeconomics, 2004, vol. 4, issue 1, 25

Abstract: We use a matching framework to explore the hypothesis that firing costs are a decreasing function of labor market tightness. Conventional wisdom suggests that differences in employment protection legislation (EPL) cause differences in labor market performance. Our hypothesis suggests a reverse causality nexus: it is labor market tightness which causes labor market rigidities. The endogeneity of firing costs produces a positive externality. We show that if this externality offsets the standard search externality, the model generates multiple equilibria. which reflect a trade off between wage moderation and the strictness of EPL. We demonstrate that the equilibria are not Pareto ranked. The analysis of local stability shows that, when firing costs externality offsets the search cost externality, the equilibrium is a stable node; vice versa, the equilibrium is an unstable saddle point. Finally, we investigate the question of social efficiency, obtaining a generalization of the Hosios (1990) condition.

Keywords: Matching Models; Firing Costs; Multiple Equilibria (search for similar items in EconPapers)
Date: 2004
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://doi.org/10.2202/1534-5998.1174 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejmac:v:topics.4:y:2004:i:1:n:5

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/bejm/html

DOI: 10.2202/1534-5998.1174

Access Statistics for this article

The B.E. Journal of Macroeconomics is currently edited by Arpad Abraham and Tiago Cavalcanti

More articles in The B.E. Journal of Macroeconomics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().