Financial Incentives and Labor Market Duality

58 Pages Posted: 24 Oct 2015 Last revised: 4 Nov 2015

See all articles by Clemence Berson

Clemence Berson

Banque de France

Nicolas Ferrari

Ministere de l’Economie, des Finances et de l’Industrie – France

Date Written: October 1, 2015

Abstract

The French labor market is divided between workers in permanent jobs and those who alternate fixed-term contracts with unemployment spells. Among other public policies aiming at reducing this duality, financial incentives could induce employers to lengthen contract duration or favor permanent contracts. This article develops a matching model fitted to the French labor-market characteristics and calibrated on French data. A gradual decrease in unemployment contributions or a firing tax reduces the duality but increases market rigidity and lowers labor productivity. However, decreasing unemployment contributions gradually is less favorable for new entrants than a firing tax and lengthens unemployment spells. An additional contribution levied on short-term contracts to finance a bonus for permanent-contract hirings also decreases labor-market duality and increases activity but without negative impacts on labor-market flexibility and productivity.

Keywords: Duality, public policies

JEL Classification: J41, J42, J48

Suggested Citation

Berson, Clemence and Ferrari, Nicolas, Financial Incentives and Labor Market Duality (October 1, 2015). Banque de France Working Paper No. 575, Available at SSRN: https://ssrn.com/abstract=2678948 or http://dx.doi.org/10.2139/ssrn.2678948

Clemence Berson (Contact Author)

Banque de France ( email )

Paris
France

Nicolas Ferrari

Ministere de l’Economie, des Finances et de l’Industrie – France ( email )

Télédoc 151
139, rue de Bercy 75572
Paris, Cedex 12
France

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