Labor Market Frictions, Job Insecurity, and the Flexibility of the Employment Relationship

Niko Matouschek and Paolo Ramezzana

No 28, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: We analyze a search model of the labor market in which firms and workers meet bilaterally and negotiate over wages in the presence of private information. We show that a fall in labor market frictions induces more aggressive wage bargaining behavior 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 labor 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 labor market frictions. We then endogenize the organizational structure of the employment relationship and show that a fall in labor 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 (search for similar items in EconPapers)
JEL-codes: D82 J41 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-lab
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