Contours of Employment Protection Reform
Olivier J. Blanchard
International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
University of Toulouse 1 - Industrial Economic Institute (IDEI); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)
November 1, 2003
MIT Department of Economics Working Paper No. 03-35
Starting with a simple benchmark, we first derive the characteristics of optimal employment protection. In the benchmark, employment protection takes the form of layoff taxes, used to finance unemployment benefits. We then consider a number of extensions, and show how this principle must be modified and refined, but not abandoned.
We then turn to the employment protection system in place in France today, and show that it differs from this principle in two main dimensions. First, contributions by firms to the unemployment insurance fund take the form of payroll taxes rather than layoff taxes. Second, the layoff process is subject to heavy administrative and judicial control.
This leads us to make two main recommendations for reform: The introduction of a layoff tax, with a corresponding decrease in the payroll tax; and a reduced role of the judicial system in the layoff process.
Number of Pages in PDF File: 42
Keywords: employment protection, severance payments, layoffs, layoff taxes, unemployment insurance, unemployment contributions
JEL Classification: J30, J32, J38, E62, H21
Date posted: November 5, 2003
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