On the Efficiency of Job and Income Protection in the Dynamic Labour Markets

Juha Kilponen

No 219, Discussion Papers from VATT Institute for Economic Research

Abstract: This paper investigates the efficiency implications of two kinds of worker protection, job security and income protection. Both of them have important aggregate efficiency effects in the dynamic labor markets, where worker mobility is costly. In the absense of firing costs, income security has ambiguous effect on production efficiency. If mobility costs are very high, dynamic costs associated to reallocation outweighs a gain from static productive efficiency as more jobs are created into high productivity sector, but need to be reallocated always when the sector is hit by a negative productivity shock. On the contrary, if mobility costs are low, a static efficiency outweighs the dynamic costs associated to reallocation. Employment protection is also more costly in the terms of productive efficiency, more it involves wasted admistrative and red-tape costs for the firms. When both job security and income protection are high, it makes labor markets more rigid and in general reduces the productive efficiency.

Keywords: Labour markets, firing costs, income protection, Labour market, Työmarkkinat, Social security, Sosiaaliturva, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, J650 - Unemployment Insurance; Severance Pay; Plant Closings, (search for similar items in EconPapers)
Date: 2000
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