The impact of EPL on labour productivity in a general equilibrium matching model

Domenico Lisi

No 2010/8, DEMQ Working Paper Series from University of Catania, Department of Economics and Quantitative Methods

Abstract: The standard analysis of the impact of EPL on labour market outcomes concentrates mainly on unemployment, disregarding the possible effect on productivity. In this paper we make (a component of) labour productivity endogenous and analyze how the presence of a stringent protection legislation affects labour market in an equilibrium matching model with endogenous job destruction. Indeed, considering labour productivity an endogenous could be important not only in the case of EPL, but also for all kind of personnel policy evaluation. In this framework high labour productivity on one hand is costly in terms of effort, on the other hand is beneficial in terms of lower job destruction. We find that high firing costs partially substitute high labour productivity in reducing job destruction and this, consequently, brings down the optimal level of productivity. Moreover, the impact of EPL on unemployment is ambiguous but numerical exercises show unambiguously how higher firing restrictions reduce different measures of aggregate welfare. To some extent, the clear emergence of these results is full of policy implication and, indeed, rationalizes the recent empirical evidence on the impact of EPL.

Keywords: Employment protection; Endogenous labour productivity; Job destruction (search for similar items in EconPapers)
JEL-codes: J24 J38 J63 J64 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010-04-01
New Economics Papers: this item is included in nep-dge, nep-eff and nep-lab
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