Two-tier labour market reform: a quantitative general equilibrium assessment

ABSTRACT

In the 1990s several European countries liberalized the use of fixed-term labour contracts in an effort to reduce persistently low employment growth. This article studies the effect of these reforms through the lens of a version of the Hopenhayn and Rogerson (1993) model calibrated on Italian data. We find no effect of the reform on total employment in steady state.

KEYWORDS:

• Labour market reforms
• employment
• general equilibrium
• Italy

JEL CLASSIFICATION:

• E24

Acknowledgement

We wish to thank Carolina Silva for helpful comments and CeRP and IIES for hospitality during the development of this project. All errors and inconsistency are our own.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See Boeri and Garibaldi (2007).

² The production function and the distribution used in the analysis will satisfy the usual assumptions needed to guarantee the uniqueness of the equilibrium. See Hopenhayn and Rogerson (1993).

³ Given the stationarity of the problem, we have removed time indexes.

⁴ Notice that the maximization operator that appears in the right-hand side of the program captures the incumbent firm’s exit decision at the beginning of the next period.

⁵ For simplicity we assume that all the firing cost is rebated back to the household. Garibaldi and Violante (2005) show that in Italy the severance payment is only part of the firing cost. This simplification is legitimate in our model since what matters is the total firing cost paid by the firm. Also, households are the ultimate receiver of any income including lawyer fees and other legal expenditures.

⁶ The labour supply is defined in Equation 4, the labour demand is obtained by integrating the decision rules for permanent and temporary labour over the stationary distribution.

⁷ Hopenhayn and Rogerson (1993) use a similar definition of equilibrium.

⁸ The source of this data is the volume ‘Rapporto Annuale’, 2012, published by ISTAT, the Italian statistical office.

⁹ Eurostat data allow us to compute the age distribution of firms for the years 2003–2007. We use an average of those 5 years here.

¹⁰ This being a further target that we match closely it lends further support to our calibration.

Additional information

Funding

We are grateful to the Spanish Ministry of Science and Innovation [ECO2012-36719] and the Generalitat Valenciana [PROMETEO/2013/037] for financial support. Claudio Campanale wishes also to thank Collegio Carlo Alberto for financial support.