(In)efficient Separations, Firing Costs and Temporary Contracts

Andrea Gerali (andrea.gerali@bancaditalia.it), Elisa Guglielminetti and Danilo Liberati

No 1330, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper we study the allocative (in)efficiency of employment protection in relation to firing costs, in a general equilibrium model with labor market frictions. The optimal firing costs depend on the level of unemployment benefits and the degree of centralized wage bargaining, two features of the labor market that induce downward wage rigidity and trigger inefficient employment separations. When restrictions on firing employees with permanent contracts are inefficiently high, the introduction of temporary contracts improves welfare but does not fully restore efficiency. A quantitative analysis for the Italian economy shows that the firing costs before the recent labor market reforms were 30% higher than the optimal level, implying a consumption loss of almost 2% in the steady state. The introduction of fixed-term jobs in the early 2000’s closed one fourth of the gap between inefficient and efficient allocation, although it led to higher unemployment rates and turnover.

Keywords: employment protection; temporary contracts; labor market institutions; structural reforms; general equilibrium model; search and matching (search for similar items in EconPapers)
JEL-codes: E32 J41 J65 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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