Macroeconomics Commons^™

Flexibility At The Margin And Labor Market Volatility In Oecd Countries, Hector Sala, José Ignacio Silva, Manuel Toledo

José Ignacio Silva

We study the business cycle behavior of segmented labor markets with flexibility at the margin (e.g., just affecting fixed-term contracts). We present a matching model with temporary and permanent jobs where (i) there is a gap in the firing costs associated with these types of jobs, and (ii) there are restrictions in the creation and duration of fixed-term contracts. We show that a labor market with flexibility at the margin increases the unemployment volatility with respect to a fully regulated one. This analysis yields new insights into the interpretation of the recent volatility changes witnessed in the OECD area.