IZA Discussion Paper No. 95 - IZA - Institute of Labor Economics

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DISCUSSION PAPER SERIES

IZA DP No. 95

Job Protection, Minimum Wage and Unemployment Pierre Cahuc André Zylberberg

December 1999

Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor

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Discussion Paper No. 95 December 1999

IZA P.O. Box 7240 D-53072 Bonn Germany Tel.: +49-228-3894-0 Fax: +49-228-3894-210 Email: [email protected]

This Discussion Paper is issued within the framework of IZA’s research area 7KH :HOIDUH 6WDWH DQG /DERU 0DUNHWV Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent, nonprofit limited liability company (Gesellschaft mit beschränkter Haftung) supported by the Deutsche Post AG. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. The current research program deals with (1) mobility and flexibility of labor markets, (2) internationalization of labor markets and European integration, (3) the welfare state and labor markets, (4) labor markets in transition, (5) the future of work, (6) project evaluation and (7) general labor economics. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character.

IZA Discussion Paper No. 95 December 1999

$%675$&7 -RE3URWHFWLRQ0LQLPXP:DJHDQG8QHPSOR\PHQW  We analyze how wage setting institutions and job-security provisions interact on unemployment. The assumption that wages are renegotiated by mutual agreement only is introduced in a matching model with endogenous job destruction j OD Mortensen and Pissarides (1994) in order to get wage profiles with proper microfoundations. Then, it is shown that job protection policies influence the wage distribution and that government mandated severance transfers from employers to workers are not any more neutral, as in the standard matching model where wages are continuously renegotiated: In our framework high redundancy transfers influence employment. Moreover, the assumption of renegotiation by mutual agreement allows us to introduce a minimum wage in a coherent way, and to study its interactions with job protection policies. Our computational exercises suggest that redundancy transfers and administrative dismissal restrictions have negligeable unemployment effects when wages are flexible or when the minimum wage is low, but a dramatic positive impact on unemployment when there is a high minimum wage.

JEL Classification: H29, J23, J38, J41, J64 Keywords: Unemployment, job protection, minimum wage, matching models, renegotiation

Pierre Cahuc Université de Paris CEPREMAP 142, rue du Chevaleret 75013, Paris France Email: [email protected]

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We are grateful to participants to seminars at CEPREMAP, CREST-INSEE, GREQAM- Université Aix-Marseille 2, GREMAQ-Université Toulouse 1, Université Catholique de Louvain la Neuve and Université d’Orléans. We wish to thank especially Jean-Pascal Benassy, Patrick Fève, Francis Kramarz and François Langot for helpful remarks.

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