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Title: Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship

Author(s): Niko Matouschek, Paolo Ramezzana and Frédéric Robert-Nicoud

Publication Date: January 2004

Keyword(s): flexibility of employment relationships, job insecurity and private information

Programme Area(s): Labour Economics

Abstract: We analyse a search model of the labour market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labour market frictions induces more aggressive wage bargaining behaviour, which in turn leads to a costly increase in job insecurity. This adverse insecurity effect can be so large that firms and workers who are in an employment relationship can be made worse off by a fall in labour market frictions. In contrast, firms and workers who are not in an employment relationship and are searching the market for a counterpart are always made better off by such a fall in labour market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labour market frictions induces a one-off reorganization in which firms and workers switch from a rigid employment relationship to a flexible one. This reorganization leads to a large, one-off increase in job insecurity and unemployment.

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Bibliographic Reference

Matouschek, N, Ramezzana, P and Robert-Nicoud, F. 2004. 'Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4193