42 Pages Posted: 4 Feb 2004
Date Written: January 2004
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: 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
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