Job-specific Investment and the Cost of Dismissal Restrictions: The Case of Portugal, Issues 2003-2075
Using a search and matching labor market equilibrium model, this paper quantifies lost labor productivity and consumption per worker that emerges from the restrictions on dismissals. Dismissal restrictions hamper the efficient reallocation of workers, with workers remaining longer in jobs. But the restrictions also tend to induce job-specific investments. A calibration exercise applied to Portugal suggests that the restrictions on dismissal slow the pace of worker reallocation and cause substantial losses of labor productivity and consumption. Although lower worker mobility induces job-specific investment that offsets part of the labor productivity and consumption losses, the size of this offsetting effect is, at most, modest.
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asset pricing equation average unemployment duration bargaining power Blanchard and Portugal calibrated Portuguese economy calibration exercise common technology level consumption per participating continuing match cost of job-specific decision problems denoted derived difference in labor dismissal penalty dismissal restrictions due to dismissal effect of job-specific employers and workers Employment Density employment protection legislations equilibrium outcomes flow value hypothetical Portuguese economy idiosyncratic productivity shock idiosyncratic shock implied initial match surplus initial wage job creation condition job destruction condition job-worker match labor market labor productivity Market tightness matching function Mortensen 1997 OECD offsetting effect parameter values participating worker percent present value productivity and consumption productivity and welfare productivity jobs productivity shock arrives reservation productivity level retrieved returns to scale search and matching separation decision severance payment steady state equilibrium threat point U.S. economy unemployed search unemployment rate United vacant job value of leisure wage rate welfare loss due worker flows