Working Paper

What are the short-run effects of increasing labor market flexibility?

Abstract: This paper evaluates the short-run effects of introducing labor market flexibility to an economy characterized by large firing taxes. Different reforms are considered: 1) eliminating all firing taxes, 2) introducing flexible new contracts while retaining the firing taxes on workers employed previous to the reform, and 3) introducing temporary contracts. The paper finds that eliminating all firing taxes increases the unemployment rate much more in the short run than in the long run, that introducing new flexible contracts has similar effects as eliminating all firing taxes, and that introducing temporary contracts of short durations can decrease the unemployment rate, but only in the short-run.

Keywords: Labor market; Temporary employees; labor contracts;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2000

Number: WP-00-29