Comments on Pierre Cahuc and Pontus Braunerhjelm Per Skedinger

Swedish Employment Protection Legislation (EPL) Sympathetic towards initiatives to scrutinize Swedish EPL system We must regularly ask ourselves whether our policies (continue to) fulfill their aims Labour markets have changed since Employment Protection Act (LAS) was introduced in 1974 Complacency about merits of the ”Swedish Labour Market Model”?

Plan of talk A case for reform? Pierre Cahuc - The reform proposal Pontus Braunerhjelm - The reform proposal Evaluations of alternative reforms

A case for reform?: I Basic aim of EPL: Provide income security to (risk-averse) workers To what extent is this aim achieved? Are there important negative side effects?

A case for reform?: II Dismissal rates seem to be reduced by EPL: Average job tenure, 2005 ”High” EP: Sweden10.4 years France11.5 years ”Low” EP: Denmark 8.1 years UK 7.8 years

A case for reform?: III One-sided EPL reforms: Sweden has probably gone too far along this route Experiences from other European countries with same reform strategy are not encouraging from equity perspective May contribute to more employment volatility over business cycle Difficult to portray as evidence-based policy Easier to explain in terms of political (insider-outsider) considerations Mostly small legislative changes have accumulated through the years without anyone taking responsibility for the whole package. Resembles tax situation before the Big Tax Reform in the early 1990s

A case for reform?: IV Strong case: As a means of reducing risks of labour market segmentation and increasing employment volatility caused by one-sided EPL reforms As a means of reducing risks of negative side effects in general, in the form of less worker mobility, less job reallocation, possibly lower productivity Weak case: As a means of increasing overall level of employment anddecreasing overall level of unemployment

Pierre Cahuc’s reform proposal: I Scrap the EPA (LAS) and introduce a tax on firings, increasing smoothly with tenure and with same rates applying to workers on regular and temporary contracts

PC reform proposal: II. Cost discontinuities in current EPL Monthly salaries, by years of tenure (for worker hired at age 25)

PC’s reform proposal: III An explicit tax is more transparent and foreseeable than an implicit tax, like EPL But: Is (another) tax a good idea in times when firms typically face liquidity problems? Would hirings still be discouraged? Would marginal groups still be at disadvantage?

Pontus Braunerhjelm’ s reform proposal: I Focus on last-in first-out rules Piecemeal reform (Braunerhjelm) vs. comprehensive reform (Cahuc) What works best?

Evaluations against other alternatives: I Austrian EPL system Severance pay accounts for workers, collectively financed by firm payments to fund Balance on account transferable when changing employers

Evaluations against other alternatives: II Firing tax / severance pay decreasing in tenure (No country has this system) Firms would still be discouraged from firing, since firing costs always decrease in future Marginal groups probably fare better than with costs increasing in tenure