DP11192 Employment protection and unemployment benefits: On technology adoption and job creation in a matching model

Author(s): Kjell Erik Lommerud, Odd Rune Straume, Steinar Vagstad
Publication Date: March 2016
Keyword(s): employment protection, job creation, Technology adoption, unemployment in-
JEL(s): H21, J38, J65, O31
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11192

We analyse the effects of different labour market policies - employment protection, unemployment benefts 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.