(In)efficient Separations, Firing Costs and Temporary Contracts

55 Pages Posted: 25 May 2021

Date Written: April 20, 2021

Abstract

In this paper we study the allocative (in)efficiency of employment protection in relation to firing costs, in a general equilibrium model with labor market frictions. The optimal firing costs depend on the level of unemployment benefits and the degree of centralized wage bargaining, two features of the labor market that induce downward wage rigidity and trigger inefficient employment separations. When restrictions on firing employees with permanent contracts are inefficiently high, the introduction of temporary contracts improves welfare but does not fully restore efficiency. A quantitative analysis for the Italian economy shows that the firing costs before the recent labor market reforms were 30% higher than the optimal level, implying a consumption loss of almost 2% in the steady state. The introduction of fixed-term jobs in the early 2000’s closed one fourth of the gap between inefficient and efficient allocation, although it led to higher unemployment rates and turnover.

Keywords: employment protection, temporary contracts, labor market institutions, structural reforms, general equilibrium model, search and matching

JEL Classification: E32, J41, J65

Suggested Citation

Gerali, Andrea and Guglielminetti, Elisa and Liberati, Danilo, (In)efficient Separations, Firing Costs and Temporary Contracts (April 20, 2021). Bank of Italy Temi di Discussione (Working Paper) No. 1330, Available at SSRN: https://ssrn.com/abstract=3852388 or http://dx.doi.org/10.2139/ssrn.3852388

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Elisa Guglielminetti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Danilo Liberati

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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