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

• Kjell Erik Lommerud Steinar Vagstad
24 Mar 2016

We analyse the effects of different labour market policies –employment protection, un-
employment bene…ts and payroll taxes –on job creation and technology choices in a model
where fi…rms are randomly matched with workers of different productivity and wages are de-
termined 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 work-
ers’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 value income security much.