Comparing the Effect of Labor Market Institutions on Employment Dynamics

Our paper seeks to gain insights into the effects of labor-market institutions on the dynamics of the labor market, during the diffusion process of new technologies. Because these institutions differ between Europe and the United States, we expect the dynamics of the labor market to also diverge between both areas. We propose an endogenous job-destruction matching framework, with heterogeneous workers, where the segmentation of the labor market between workers having the required ability to do a technological job and the rest of the workers is endogenous. We show that the dynamics of this segmentation depends on the generosity of the unemployment-benefit system. When the system is generous, we obtain a U-shaped path of the labor-market segmentation, implying that workers that previously had access to technological positions may be excluded from them at a given moment of time. The presence of firing costs tends to improve job stability, but its final effect on the market tightness and unemployment rates is minor.