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Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship

42 Pages Posted: 4 Feb 2004  

Niko Matouschek

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Paolo Ramezzana

Federal Trade Commission

Frederic Robert-Nicoud

University of Geneva - Department of Political Economics; Centre for Economic Policy Research (CEPR)

Date Written: January 2004

Abstract

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.

Keywords: Job insecurity, flexibility of employment relationships, private information

JEL Classification: D82, J41

Suggested Citation

Matouschek, Niko and Ramezzana, Paolo and Robert-Nicoud, Frederic, Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship (January 2004). CEPR Discussion Paper No. 4193. Available at SSRN: https://ssrn.com/abstract=498722

Niko Matouschek (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-4166 (Phone)
847-467-1777 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Paolo Ramezzana

Federal Trade Commission ( email )

601 Pennsylvania Avenue, NW
Washington, DC 20580
United States

Frederic L. Robert-Nicoud

University of Geneva - Department of Political Economics ( email )

40, boulevard du Pont-d'Arve
Geneva 4, CH-1211
Switzerland
+41 22 379 8272 (Phone)
+41 22 379 8293 (Fax)

HOME PAGE: http://www.unige.ch/ses/ecopo/staff/robert/home.html

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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