Employment protection

Abstract

Employment protection legislation is generally blamed for reducing labor turnover and increasing the duration of unemployment. This paper argues that a proper evaluation of employment protection requires a model where there is need for it. The model in this paper gives an insurance role to employment protection in the absence of perfect insurance markets. It is shown that there is a role for both severance payments and advance notice of termination and that if they are chosen optimally, exogenous unemployment insurance does not influence equilibrium employment. Simulations show that if employment protection is chosen optimally, it does not reduce job creation when compared to an equilibrium without it.