Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship
Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
Federal Trade Commission
University of Geneva - Department of Political Economics; Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 4193
We analyse a search model of the labour market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labour market frictions induces more aggressive wage bargaining behaviour, which in turn leads to a costly increase in job insecurity. This adverse insecurity effect can be so large that firms and workers who are in an employment relationship can be made worse off by a fall in labour market frictions. In contrast, firms and workers who are not in an employment relationship and are searching the market for a counterpart are always made better off by such a fall in labour market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labour market frictions induces a one-off reorganization in which firms and workers switch from a rigid employment relationship to a flexible one. This reorganization leads to a large, one-off increase in job insecurity and unemployment.
Number of Pages in PDF File: 42
Keywords: Job insecurity, flexibility of employment relationships, private information
JEL Classification: D82, J41
Date posted: February 4, 2004
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