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|
|Programme Areas:||Labour Economics|
|Link to this Page:||www.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.