Financial Incentives and Labor Market Duality
58 Pages Posted: 24 Oct 2015 Last revised: 4 Nov 2015
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: Suggested Citation