Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 18/12: Employment protection and unemployment benefits: on technology adoption and job creation in a matching model

Kjell Erik Lommerud (), Odd Rune Straume () and Steinar Vagstad ()
Additional contact information
Kjell Erik Lommerud: Department of Economics, University of Bergen, Postal: Department of economics, Fosswinckelsgate 14, NO-5007 Bergen
Odd Rune Straume: Department of Economics, University of Minho, Postal: Department of Economics, School of Economics and Management, University of Minho, Campus de Gualtar, 4710-057 Braga, Portugal
Steinar Vagstad: Department of Economics, University of Bergen, Postal: Department of Economics, Fosswinckelsgate 14, 5007 NO-Bergen

Abstract: We analyse the effects of different labour market policies — employment protection, unemployment benefits and payroll taxes — on job creation and technology choices in a model where firms are randomly matched with workers of different productivity and wages are determined by ex-post bargaining. In this setting, as long as firing costs remain below a certain level, unemployment benefits are detrimental both to job creation and technology adoption while the effects of employment protection are mixed, as higher firing costs stifle job creation but stimulate technology investments. This suggests that a ‘flexicurity’ policy,with low employment protection and high unemployment benefits, might have the adverse effect of slowing down technological progress and job growth. Indeed, our analysis of the optimal policy solution suggests that flexicurity is often not optimal, and may be optimal only in conjunction with payroll subsidies.

Keywords: Technology adoption; job creation; employment protection; unemployment insurance.

JEL-codes: H21; J38; J65; O31

33 pages, December 7, 2012

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