Can Institutional Reform Reduce Job Destruction and Unemployment Duration? Yes it Can

Esther Perez Ruiz and Yao Yao

No 2012/054, IMF Working Papers from International Monetary Fund

Abstract: We read search theory's unemployment equilibrium condition as an Iso-Unemployment Curve(IUC).The IUC is the locus of job destruction rates and expected unemployment durations rendering the same unemployment level. A country's position along the curve reveals its preferences over the destruction-duration mix, while its distance from the origin indicates the unemployment level at which such preferences are satisfied Using a panel of 20 OECD countries over 1985-2008, we find employment protection legislation to have opposing efects on destructions and durations, while the effects of the remaining key institutional factors on both variables tend to reinforce each other. Implementing the right reforms could reduce job destruction rates by about 0.05 to 0.25 percentage points and shorten unemployment spells by around 10 to 60 days. Consistent with this, unemployment rates would decline by between 0.75 and 5.5 percentage points, depending on a country's starting position.

Keywords: WP; Search model; labor market institutions; unemployment inflows; unemployment duration; destruction rate; OECD labor market policies database; replacement rate; hazard rate; inflow rate; Job destruction; Unemployment; Unemployment rate; Job creation; Labor markets; North America (search for similar items in EconPapers)
Pages: 25
Date: 2012-02-01
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Citations: View citations in EconPapers (7)

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