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Contours of Employment Protection Reform

42 Pages Posted: 5 Nov 2003  

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Jean Tirole

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)

Date Written: November 1, 2003

Abstract

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.

Keywords: employment protection, severance payments, layoffs, layoff taxes, unemployment insurance, unemployment contributions

JEL Classification: J30, J32, J38, E62, H21

Suggested Citation

Blanchard, Olivier J. and Tirole, Jean, Contours of Employment Protection Reform (November 1, 2003). MIT Department of Economics Working Paper No. 03-35. Available at SSRN: https://ssrn.com/abstract=464282 or http://dx.doi.org/10.2139/ssrn.464282

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Place Anatole France
21 Allees de Brienne
F-31042 Toulouse Cedex
France
+33 5 61 12 8642 (Phone)
+33 5 61 12 8637 (Fax)

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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