Nawid Siassi

       TU Wien

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From Dual to Unified Employment Protection: Transition and Steady State
(with Juan J. Dolado and Etienne Lalé)

Abstract

Three features of real-life reforms of dual employment protection legislation (EPL) systems
are particularly hard to study through the lens of standard labour-market search models:
(i) the excess job turnover implied by dual EPL, (ii) the non-retroactive nature of EPL
reforms, and (iii) the transition dynamics from dual to a unified EPL system. In this paper,
we develop a computationally tractable model addressing these issues. Our main finding
is that the welfare gains of reforming a dual EPL system are sizeable and achieved mostly
through a decrease in turnover at short job tenures. This conclusion continues to hold in
more general settings featuring wage rigidities, heterogeneity in productivity upon matching,
and human capital accumulation. We also find substantial cross-sectional heterogeneity in
welfare effects along the transition to a unified EPL scheme. Given that the model is
calibrated to data from Spain, often considered as the epitome of a labour market with dual
EPL, our results should provide guidance for a wide range of reforms of dual EPL systems.

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