DP11192 | Employment protection and unemployment benefits: On technology adoption and job creation in a matching model

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We analyse the effects of different labour market policies –employment protection, un- employment bene…ts and payroll taxes –on job creation and technology choices in a model where fi…rms are randomly matched with workers of different productivity and wages are de- termined by ex-post bargaining. The model is characterised by two intertwined sources of inefficiency, namely a matching externality and a hold-up externality associated with work- ers’bargaining strength. Results depend on the relative importance of the two externalities and on worker risk aversion. ‘Flexicurity’, meaning low employment protection and generous unemployment insurance, can be optimal if the hold-up problem is relatively important and workers value income security much.