Experience Rating Versus Employment Protection Laws in a Model Where Firms Monitor Workers

15 Pages Posted: 2 Sep 2005

See all articles by Julia Fath

Julia Fath

University of Cologne - Faculty of Management, Economics and Social Sciences

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Abstract

While layoff costs in the U.S. are mostly due to experience-rated unemployment insurance, layoff costs in European labour markets are primarily a consequence of employment protection laws. In this paper we compare the effects of experience rating and employment protection laws on employment and welfare in a model where unemployment arises due to efficiency wage setting and where labour turnover is inefficiently high. We show that a revenue-neutral introduction of experience rating reduces labour turnover and increases employment and welfare. The introduction of employment protection laws may also reduce labour turnover but employment declines.

Suggested Citation

Fath, Julia and Fuest, Clemens, Experience Rating Versus Employment Protection Laws in a Model Where Firms Monitor Workers. Scandinavian Journal of Economics, Vol. 107, No. 2, pp. 299-314, June 2005. Available at SSRN: https://ssrn.com/abstract=783014

Julia Fath (Contact Author)

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Department of Economics
D-50923 Cologne
Germany

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

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