Evaluating labor market reforms: A normative analysis

Céline Poilly () and Dennis Wesselbaum

Journal of Macroeconomics, 2014, vol. 39, issue PA, 156-170

Abstract: This paper shows that a reform aimed at improving labor market flexibility is not necessarily welfare-enhancing. We adopt a New-Keynesian model enriched with search and matching frictions. We investigate the effects of institutional labor market reforms, described by a permanent change in firing costs and unemployment benefits. Improving labor market flexibility by cutting unemployment benefits is welfare-enhancing for households. On the contrary, cutting firing costs reduces welfare. We argue that real wage dynamics play a crucial role in the results. Furthermore, welfare effects tend to zero when the reform is pre-announced.

Keywords: Labor market policies; Search and matching frictions; Welfare (search for similar items in EconPapers)
JEL-codes: D61 E64 J63 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:39:y:2014:i:pa:p:156-170

DOI: 10.1016/j.jmacro.2013.10.004

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