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Evaluating Labor Market Reforms: A General Equilibrium Approach

Author

Listed:
  • Cesar Alonso-Borrego

    (Universidad Carlos III de Madrid)

  • Jesus Fernandez-Villaverde

    (University of Pennsylvania)

  • Jose E. Galdon-Sanchez

    (Universidad Publica de Navarra)

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 fixedterm contracts increase unemployment, reduce output, and raise productivity. The welfare effects are ambiguous.

Suggested Citation

  • Cesar Alonso-Borrego & Jesus Fernandez-Villaverde & Jose E. Galdon-Sanchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," Working Papers 10, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:487
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    References listed on IDEAS

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    More about this item

    Keywords

    Fixed-term contracts; Firing costs; General equilibrium; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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