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Can Institutional Reform Reduce Job Destruction and Unemployment Duration? Yes it Can

25 Pages Posted: 28 Feb 2012  

Esther Pérez Ruiz

International Monetary Fund (IMF)

Yao Yao

University of Mannheim

Date Written: February 2012


We read search theory's unemployment equilibrium condition as an Iso-Unemployment Curve(IUC).The IUC is the locus of job destruction rates and expected unemployment durations rendering the same unemployment level. A country's position along the curve reveals its preferences over the destruction-duration mix, while its distance from the origin indicates the unemployment level at which such preferences are satisfied Using a panel of 20 OECD countries over 1985-2008, we find employment protection legislation to have opposing efects on destructions and durations, while the effects of the remaining key institutional factors on both variables tend to reinforce each other. Implementing the right reforms could reduce job destruction rates by about 0.05 to 0.25 percentage points and shorten unemployment spells by around 10 to 60 days. Consistent with this, unemployment rates would decline by between 0.75 and 5.5 percentage points, depending on a country's starting position.

Keywords: Search Model, Labor Market Institutions, Unemployment Inflows, Unemployment Duration, Economic Models, Labor Market Policy, Labor Market Reforms, Oecd

JEL Classification: E24, J30, J60

Suggested Citation

Pérez Ruiz, Esther and Yao, Yao, Can Institutional Reform Reduce Job Destruction and Unemployment Duration? Yes it Can (February 2012). IMF Working Paper No. NO.12/54. Available at SSRN:

Esther Pérez Ruiz (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yao Yao

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Mannheim, 68131

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