Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship

Niko Matouschek, Paolo Ramezzana and Frederic Robert-Nicoud

No 4193, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse a search model of the labour market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labour market frictions induces more aggressive wage bargaining behaviour, which in turn leads to a costly increase in job insecurity. This adverse insecurity effect can be so large that firms and workers who are in an employment relationship can be made worse off by a fall in labour market frictions. In contrast, firms and workers who are not in an employment relationship and are searching the market for a counterpart are always made better off by such a fall in labour market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labour market frictions induces a one-off reorganization in which firms and workers switch from a rigid employment relationship to a flexible one. This reorganization leads to a large, one-off increase in job insecurity and unemployment.

Keywords: Job insecurity; Flexibility of employment relationships; Private information (search for similar items in EconPapers)
JEL-codes: D82 J41 (search for similar items in EconPapers)
Date: 2004-01
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Working Paper: Labor Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship (2004)
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