Evaluating Labor Market Reforms: A General Equilibrium Approach

45 Pages Posted: 29 Apr 2004

See all articles by Cesar Alonso-Borrego

Cesar Alonso-Borrego

Charles III University of Madrid - Department of Economics

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Jose E. Galdon-Sanchez

Universidad Publica de Navarra ; IZA

Multiple version iconThere are 2 versions of this paper

Date Written: April 24, 2004

Abstract

Job security provisions are commonly invoked to explain the high and persistent European unemployment rates. This belief has led several countries to reform their labor markets and liberalize the use of fixed-term contracts. Despite how common such contracts have become after deregulation, there is a lack of quantitative analysis of their impact on the economy. To fill this gap, we build a general equilibrium model with heterogeneous agents and firing costs in the tradition of Hopenhayn and Rogerson (1993). We calibrate our model to Spanish data, choosing in part parameters estimated with firm-level longitudinal data. Spain is particularly interesting, since its labor regulations are among the most protective in the OECD, and both its unemployment and its share of fixed-term employment are the highest. We find that fixed-term contracts increase unemployment, reduce output, and raise productivity. The welfare effects are ambiguous.

Keywords: Fixed-term contracts, Firing costs, General equilibrium, Heterogeneous agents

JEL Classification: E24, C68, J30

Suggested Citation

Alonso-Borrego, Cesar and Fernández-Villaverde, Jesús and Galdon-Sanchez, Jose E., Evaluating Labor Market Reforms: A General Equilibrium Approach (April 24, 2004). Available at SSRN: https://ssrn.com/abstract=536023 or http://dx.doi.org/10.2139/ssrn.536023

Cesar Alonso-Borrego

Charles III University of Madrid - Department of Economics ( email )

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Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Jose E. Galdon-Sanchez

Universidad Publica de Navarra ( email )

Department of Economics
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