Employment Protection Reform in European Labor Markets: The Collective Bargaining Regime Matters
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Employment Protection Reform in European Labor Markets: The Collective Bargaining Regime Matters Francesco De Palma1 · Yann Thommen1
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Policy advisers repeatedly call on Western European countries to reform their employment protection legislation (EPL) by switching to a layoff tax model of unemployment insurance (UI) funding. This new design, partly based on the existing “experience-rating” (ER) system in the U.S., should induce firms to internalize layoff fiscal costs and hence reduce unemployment. However, its success remains uncertain in economies with a collective wage-setting system, as do those of many Western European countries. Using a matching model with endogenous job destruction, we provide an ex-ante evaluation of this policy reform’s effects on labor market outcomes and aggregate welfare in firm-level and sector-level bargaining economies. Our numerical analyses yield two main results. First, compared to simply increasing firing/dismissal costs, implementing an ER system improves labor market outcomes in both types of economies. Second, the design of the reform has to be adapted to the level of wage bargaining in the economy. Because firms can adjust most of the terms and conditions of employment (including wages) in decentralized negotiations, adding ER to existing EPL yields the largest reduction in unemployment under firm-level bargaining, while with sector-level bargaining, ER is better implemented with a relaxation of existing EPL. However, if the aim is to increase aggregate welfare, it is better under both bargaining regimes to relax existing EPL when implementing ER. Keywords Search and matching models · Collective bargaining · Experience rating · Employment protection JEL Classification E10 · J48 · J50 · J60
* Yann Thommen [email protected] 1
CNRS, BETA, Université de Strasbourg, Université de Lorraine, 67000 Strasbourg, France
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F. De Palma, Y. Thommen
1 Introduction The vast majority of Western European labor markets are characterized by the coexistence of unemployment insurance (UI) and employment protection legislation (EPL).1 These two frameworks are separate and uncoordinated. Existing sets of national EPL are criticized for being too strict and for creating uncertainty, leading to exacerbated segmentation, slow job reallocation and a feeling of insecurity for workers.2 When workers lose their job, they receive unemployment benefits according to an insurance scheme financed by employee–employer payroll taxes (MISSOC Database). These payroll taxes increase the wage burden, have a disincentive effect on employment, and do not encourage employers to internalize the social costs of labor turnover. This creates a double incentive to destroy jobs (Cahuc et al. 2014). Blanchard and Tirole (2008) have suggested combining EPL and UI in a coherent scheme in which unemployment benefits are funded by layoff taxes. Their proposal is inspired by the experience-rating (ER) system in the U
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