HEC Research Papers Series,
HEC Paris

Abstract: The design of employment protection legislation (EPL) is of particular importance in the European debate on the contours of labor market reform. In this article we appeal to an equilibrium unemployment model to investigate the virtues of EPL reform which reduces the red tape and legal costs associated with layo s and introduces a U.S.-style experiencerating system, which we model as a combination of a layo tax and a payroll subsidy. The reform considered shows that it is possible to improve the eciency of employment protection policies without a ecting the extent of worker protection on the labor market. These results are consistent with the conventional wisdom that experience rating is desirable, not only as an integral component of unemployment-compensation nance, as most studies acknowledge, but also as part and parcel of a virtuous EPL system.

Keywords: Search and Matching Models; Employment Protection; State-Contingent Layo Tax; Experience-Rating

JEL-codes: J41; J48; J60

35 pages, April 1, 2008

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