Evaluating Labor Market Reforms: A General Equilibrium Approach

Abstract

Job security provisions are commonly invoked to explain the high and persistent European unemployment rates. This belief has led several countries to reform their labor markets and liberalize the use of fixed-term contracts. Despite how common such contracts have become after deregulation, there is a lack of quantitative analysis of their impact on the economy. To fill this gap, we build a general equilibrium model with heterogeneous agents and firing costs in the tradition of Hopenhayn and Rogerson (1993). We calibrate our model to Spanish data, choosing in part parameters estimated with firm-level longitudinal data. Spain is particularly interesting, since its labor regulations are among the most protective in the OECD, and both its unemployment and its share of fixed-term employment are the highest. We find that fixed-term contracts increase unemployment, reduce output, and raise productivity. The welfare effects are ambiguous.

Two-tier labour market reform: a quantitative general equilibrium assessment

“…This result conforms to previous findings in the literature (i.e. Blanchard and Landier, 2002;Alonso-Borrego et al, 2005;Boeri and Garibaldi, 2007). We leave to future research the study of what may have caused the increase in employment in the economies that introduced reforms to EPL similar to the ones considered in the present work.…”

Fixed-Term and Permanent Employment Contracts: Theory and Evidence

“…In other words, the fraction of temporary worker is itself a policy parameter. That model is unable to answer why these two contracts 2 In the data, many workers that meet a firm for the first time are hired under a permanent contract. 3 Faccini (2009) also motivates the existence of temporary contracts as a screening device.…”

“…1 The increase in welfare that results from such a policy change is caused by a decrease in the unemployment rate; some workers that would otherwise be unemployed are now To the best of our knowledge, the literature lacks a theory of the existence of twotiered labor markets in which some some worker-firm pairs begin relationships on a temporary basis and other worker-firm pairs on a permanent basis. 2 Again, by temporary and permanent relationships we have something specific in mind; namely contracts with different degrees of labor protection. Our study is not the first one that analyzes this question within a theoretical or quantitative framework, so by theory we mean not assuming an ex-ante segmentation of a labor market into temporary workers or permanent workers.…”

Estimating the probability of leaving unemployment using uncompleted spells from repeated cross-section data

“…7 Despite all these changes, a decade after this reform, the unemployment rate remained very much unchanged. However, the share of long-term unemployed has decreased between the mid-80s and early 90s (see figure 1).…”

“…We propose an econometric method that allows us to estimate the probability of leaving unemployment using repeated cross-section data. The most important features of the method are that it estimates the exit probability at the individual level and therefore does not have the small cell problem associated with the grouping approach in the existing previous methods using repeated cross-section 7 Female labor force participation was around 28% in 1978 and went up to 37% in 1994. This increase is concentrated among females between 20 and 55 years old.…”