DP4198 Does the Market Provide Sufficient Employment Protection?

Author(s): Roberto Burguet, Ramon Caminal
Publication Date: January 2004
Keyword(s): employment protection, experimentation, lay-offs, severance payments
JEL(s): J41, J65
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4198

This Paper examines the role of employment protection when firms learn over time about the value of the match. When parties can commit to future wages, equilibrium contracts stipulate positive severance payments as an instrument to induce efficient lay-off decisions and there is no room for public intervention. When parties cannot commit to future wages, ex-post bargaining leads to excessive dismissals, and therefore the market provides insufficient employment protection. In this case, a Pigouvian tax/subsidy scheme will correct the inefficiency by enhancing employment protection.