Employment Protection and Unemployment Benefits: On Technology Adoption and Job Creation in a Matching Model
31 Pages Posted: 18 Apr 2016
Date Written: March 2016
Abstract
We analyse the effects of different labour market policies - employment protection, unemployment benefits and payroll taxes - on job creation and technology choices in a model where firms are randomly matched with workers of different productivity and wages are determined by ex-post bargaining. The model is characterised by two intertwined sources of inefficiency, namely a matching externality and a hold-up externality associated with workers' bargaining strength. Results depend on the relative importance of the two externalities and on worker risk aversion. "Flexicurity", meaning low employment protection and generous unemployment insurance, can be optimal if the hold-up problem is relatively important and workers greatly value income security.
Keywords: Technology adoption; job creation; employment protection; unemployment in-
JEL Classification: H21, J38, J65, O31
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