1. Moving Towards a Single Labour Contract. Transition vs. Steady State Juan J. Dolado Etienne Lalé Nawid Siassi (EUI & CEPR) (U. Bristol) (U. Konstanz) (EUI & CEPR) (U. Bristol) (U. Konstanz) Structural Reforms in the wake of recovery: Where do we stand? Banco de España - Banque de France Research Conference

2. Motivation

3.  Employment Protection Legislation (EPL) has been rationalized on several grounds (to):  Correct unbalanced bargaining power in wage negotiations  Prevent moral hazard by employers  Incentivize employer-sponsored training schemes  Provide insurance to risk-averse workers against dismissals Different aspects of EPL:  Mandatory severance pay  Red-tape/judicial/ procedural costs of dismissals  Third-party payments (firing taxes, contributions)  Regulations restricting use of fixed-term contracts

4.  Dual Labour Markets  Open-ended/perm contracts (PCs) bear stringent mandatory redundancy pay & high red-tape costs  Fixed-term/temp contracts (FTCs) bear much lighter EPL (termination costs) & no red-tape costs  EPL gap leads to a large discontinuity in firing costs → “Revolving door” [workers rotate between TCs and unemployment with low access to PCs]  Negative consequences for unemployment, human capital, and innovation

5. Illustration: Spain as epitome of a Dual LM (pre-2012) Proportion PC in new contracts

6.  Poor LM performance during the Great Recession has triggered a debate on how to redesign EPL in Dual LM → Several proposals  Unified contracts ( keep all FTC) with long entry phases  Unified contracts with experience rating (Mutual Fund)  Single Open-ended Contract (SOEC) (+ capitalization fund)  Key features of SOEC: (i) open-ended contracts, (ii) lower red-tape costs, (iii) severance pay increases smoothly with tenure  Little is known about desirable profile of SOEC and its effects during transition between EPL regimes + Welfare implications García-Perez & Osuna (2014)

7.  Provides analytical framework for the design of an optimal SOEC (+ entry phase) & its implementation (transition phase) (Benchmark: EPL in Spain pre- 2012)  Extends standard MP S&M model with endogenous job destruction to accommodate the following features:  Insurance role of EPL (relative to UI) when workers are risk averse  Workers differ in liquidity constraints (by age)  Workers differ in job tenure  UI is financed by payroll taxes  Tractability outside steady state (transition phase) This paper

8.  EPL as insurance device [Lazear (1990), Blanchard & Tirole (2008 ), Pissarides (2010), Cheron et al. (2011) Lalé (2014), etc.]  MP S&M models of Dual EPL [Blanchard & Landier (2002), Cahuc & Postel-Vinay (2002), Kugler & Saint-Paul (2004), Costain et al. (2010) Bentolila et al. (2012), Cahuc et al. (2012), Aguirregabíria & Alonso Borrego (2014), García-Pérez & Osuna (2014), etc.]  Single/ Unified contract proposals [Cahuc & Kramarz (2005), Boeri & Garibaldi (2008), Bentolila & Jansen (2010), Ichino (2014), Conde-Ruiz et al. (2011), Cahuc (2012), etc.] Related literature

9. Model

10. Preliminaries,  > 0

12. [Castañeda et al. (2003)] /death

14. Note:  (  ) can be replaced by  (  ) where (1-  )= red-tape cost

15. Workers

17. Firms

20. New hires Ongoing jobs Non-employment Flow equations Aggregate

22. Results

27. Productivity cut-offs

28. Wages

29. Hazard rate of employment (JD)

31. Steady state welfare comparisons of alternative SOEC+ entry phase

32. Optimal SOEC

33. Hazard rate of employment Average wage - all workers

34. Benchmark EPL vs. Optimal SOEC    

35. Sensitivity analysis

36. Transition & Welfare

37. Transitional dynamics & Welfare analysis  Implementation of SOEC: Non-retroactive reform (only newly- formed matches subject to SOEC) vs. Retroactive reform (all current population subject to SOEC)  Analysis of Transitional Dynamics (SOEC-NR)  Analysis of average welfare gains over transition phase and breakdown of gains by workers and adjustments  Welfare measured in CEU across dual EPL & SOEC regimes

40. Conclusions

41.  SOEC with 2 years of entry phase and a slope of 5 d.w.y.s. maximizes steady-state lifetime utility of a newborn worker for the chosen parameterization of the model  SOEC implies allocation gains by removing “ revolving doors” in LM trajectories and thus job turnover at short tenures  Non-retroactive reform: transition towards SOEC entails significant welfare gains for current population, especially for young workers  Retroactive reform implies overall welfare gains but most older workers lose  UI ( -moral hazard) is a more efficient way of ensuring risk- averse workers than EPL

42. Thanks for your attention