Do employment contract reforms affect welfare?

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1 Do employment contract reforms affect welfare? Cristina Tealdi IMT Lucca Institute for Advanced Studies April 26, 2013 Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

2 Motivation: EU unemployment rate much higher than US levels U n e m p lo y m e n t R a te E U U S A After 25 years EU unemployment rate much higher than US levels Y e a r Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

3 Motivation: Youth unemployment rate very high in EU Y o u n g U n e m p lo y m e n t R a te 2 6 E U 2 4 U S A EU youth unemployment rate (15-24) very high Introduction of short-term contracts in mid-80s to increase flexibility Y e a r Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

4 Motivation: Share of short-term contracts increased substantially Unemployment Short-Term Rate Contracts Total Youth (Share) France Germany Italy Netherlands Portugal Spain EU Source: OECD (1985)(2006) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

5 Objectives 1 Who are the workers hired short-term? 2 Are workers better off? 3 Do young workers benefit? 4 How flexible should the system be? Without answering these questions we will not be able to Design new labor market policy interventions Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

6 Characteristics of workers hired on a short-term basis: Female Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

7 Characteristics of workers hired on a short-term basis: Blue Collars, Not Managers and White Collars Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

8 Characteristics of workers hired on a short-term basis: Young Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

9 Characteristics of workers hired on a short-term basis: Poorly educated Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

10 Characteristics of workers hired on a short-term basis: Recent college graduates Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

11 Earnings: Earnings are higher among permanent workers Log earnings Log earnings Log earnings Log earnings Log earnings Permanent (0.015) (0.015) (0.015) (0.015) (0.015) Male (0.010) (0.010) (0.010) (0.010) (0.101) South (0.011) (0.011) (0.011) (0.011) (0.011) Manager (0.027) (0.018) (0.018) (0.018) Age (0.000) (0.003) (0.003) Age (0.000) (0.000) Age Group (0.020) (0.020) Age Group (0.012) (0.012) Master s (0.093) Bachelor s (0.014) (0.014) (0.014) (0.014) 5 Year Bachelor s (0.015) 3 Year Bachelor s (0.041) Firm Size (0.011) (0.011) (0.011) Constant (0.023) (0.066) (0.066) (0.017) (0.017) Number of observations R Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

12 Turnover: Sequences of short-term employment and unemployment Percentage of workers hired short-term First job Panel A: Transitions to the short-term contract Non-employment Short-term Short-term Long-term Panel B: Transitions from the short-term contract Non-employment Short-term Short-term (first job) Long-term Non-employment Short-term Short-term (not first job) Long-term Number of observations Source: Work Histories Italian Panel (WHIP). Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

13 The Model Extension of the standard Mortensen-Pissarides search model Differentiated contracts Workers heterogeneity Two labor markets: junior and senior workers Pre and post reforms setup Essential to derive welfare conclusions Counterfactuals To design policy interventions Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

14 The Model: General Features (I) Workers Measure 1 Heterogeneous with respect to productivity: H type productivity y H (with probability p) L type productivity y L < y H (with probability 1 p) Can be: Employed Unemployed Out of the labor force Entry level productivity y0 when they are born y 0 < y L < y H Junior At rate λ productivity shock Senior Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

15 The Search Model: General Features (II) Firms Hire both junior & senior workers When they open a position vacancy cost c When they hire a worker welfare and social security cost τ Matching Workers and firms come together through a matching function q(u, v) Wages set with Nash Bargaining between representatives of workers and firms (not contingent on productivity, but on type of contract and seniority) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

16 The Search Model: Types 1 Benchmark pre-reforms: ONLY permanent contracts Firing is not allowed Junior and senior workers are hired permanently functions-pre 2 Post-reforms: both permanent AND short-term contracts Firms can offer permanent or short-term contracts every time they open a vacancy Associated with short-term contracts No firing cost at expiration No possibility of renewal Lower costs of vacancies and social security fees functions-post Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

17 The Search Model: Equilibrium Optimal for the firm to Hire junior workers short-term Upgrade senior h-type workers to a permanent contract Offer senior l-type workers a short-term contract This decision is driven by: Lower cost of welfare and social security fees associated with short-term contracts (τo p > τo s ) Lower vacancy cost associated with short-term contracts (c p o > co) s No firing associated with permanent contracts Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

18 Model Testing: Calibration Parameter values selected 1 According to the literature 2 To match employment, unemployment, labor force participation rates and wages in the data 3 According to Italian regulations calib The model fits well the data For junior workers For senior workers Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

19 Model Testing: Welfare changes by worker s types Junior workers worse off Pre-reforms Post-reforms Average working income while in the labor force (1000 e) Junior Senior H type Senior L type Average time in the labor force (in months) Junior Senior H type Senior L type Present discounted value of total income while in the labor force (1000 e) Junior Senior H type Senior L type Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

20 Model Testing: Lifetime income changes by worker s types More productive workers better off Pre-reforms Post-reforms Average working income while in the labor force (1000 e) H type L type Average time in the labor force (in months) H type L type Present discounted value of total income while in the labor force (1000 e) H type L type Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

21 Policy interventions 1 Changing the length of the short-term contract Longer short-term contracts are beneficial for junior and senior workers 2 Adopting an American-style system Junior workers benefit Senior workers may not be better off Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

22 Changing the length of the contract Longer contracts benefit junior workers S h a r e o f ju n io r p o p u la tio n E m p lo y m e n t U n e m p lo y m e n t R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

23 Changing the length of the contract Minimal effect for senior workers 7 0 E m p lo y m e n t U n e m p lo y m e n t S h a r e o f s e n io r p o p u la tio n R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

24 Changing the length of the contract Junior workers might be as good as before P r e s e n t d is c o u n te d v a lu e o f in c o m e (in th o u s a n d s o f e u r o ) P r e -r e fo r m s P o s t-r e fo r m s R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

25 Changing the length of the contract Senior L-type workers are worse off P r e s e n t d is c o u n te d v a lu e o f in c o m e (in th o u s a n d s o f e u r o ) P r e -r e fo r m s P o s t-r e fo r m s R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

26 Changing the length of the contract Increased inequality P r e s e n t d is c o u n te d v a lu e o f in c o m e (in th o u s a n d s o f e u r o ) P r e -r e fo r m s P o s t-r e fo r m s h -ty p e P o s t-r e fo r m s l-ty p e R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

27 Adopting an American-style system Only one type of contract available (open-end) Possibility of firing any time at no cost Worker-firm bargaining Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

28 Adopting an American-style system E m p lo y m e n t U n e m p lo y m e n t S h a r e o f ju n io r p o p u la tio n fu tu r e -r e fo r m s fu tu r e -r e fo r m s M a tc h d e s tr u c tio n r a te (d ) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

29 Adopting an American-style system Better outcome for junior workers E m p lo y m e n t U n e m p lo y m e n t fu tu r e -r e fo r m s S h a r e o f ju n io r p o p u la tio n p r e -r e fo r m s p o s t-r e fo r m s p o s t-r e fo r m s p r e -r e fo r m s fu tu r e -r e fo r m s M a tc h d e s tr u c tio n r a te (d ) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

30 Adopting an American-style system 7 0 E m p lo y m e n t U n e m p lo y m e n t 6 5 S h a r e o f s e n io r p o p u la tio n fu tu r e -r e fo r m s fu tu r e -r e fo r m s M a tc h d e s tr u c tio n r a te (d ) x Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

31 Adopting an American-style system Senior workers might face more unemployment p o s t-r e fo r m s E m p lo y m e n t U n e m p lo y m e n t S h a r e o f s e n io r p o p u la tio n p r e -r e fo r m s fu tu r e -r e fo r m s fu tu r e -r e fo r m s p o s t-r e fo r m s p r e -r e fo r m s x M a tc h d e s tr u c tio n r a te (d ) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

32 Adopting an American-style system Junior workers are better off 2 2 P r e s e n t d is c o u n te d v a lu e o f in c o m e (th o u s a n d s o f e u r o ) fu tu r e -r e fo r m s p r e -r e fo r m s p o s t-r e fo r m s M a tc h d e s tr u c tio n r a te (d ) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

33 Adopting an American-style system Senior workers might be worse off P r e s e n t d is c o u n te d v a lu e o f in c o m e (th o u s a n d s o f e u r o ) fu tu r e -r e fo r m s H -ty p e p o s t-r e fo r m s H -ty p e fu tu r e -r e fo r m s L -ty p e p r e -r e fo r m s p o s t-r e fo r m s L -ty p e M a tc h d e s tr u c tio n r a te (d ) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

34 Adopting an American-style system Overall less inequality fu tu r e -r e fo r m s H -ty p e p o s t-r e fo r m s H -ty p e P r e s e n t d is c o u n te d v a lu e o f in c o m e (th o u s a n d s o f e u r o ) p r e -r e fo r m s fu tu r e -r e fo r m s L -ty p e p o s t-r e fo r m s L -ty p e M a tc h d e s tr u c tio n r a te (d ) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

35 Conclusions Junior workers are worse off after the reforms More productive workers are better off Less productive workers are worse off Policy for the future: Longer short-term contracts may improve the labor market An American style system may Improve the dual market problem Improve the conditions of junior people Reduce the of senior people Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

36 Thank you! Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

37 The Search Model: Pre-reforms Value functions Vacancies rj V Y = c p y + α p y [J E Y JV Y ] rj V O = cp o + α p o[(pj EH O + (1 p)jel O ) JV O ] Filled positions rj E Y = y 0 w y τ p y + λ[p(j EH O rj EH + δ(j V Y JE Y ) JE Y ) + (1 p)(jel O JE Y )] O = y w o τo p + δ(jo V JEH O ) + sp (JO V JEH O ) rjo EL = y 0 w o τo p + δ(jo V JEL O ) + sp (JO V JEL O ) types Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

38 The Search Model: Post-reforms Value functions Vacancies rj V Y = max{ c s 2y + α s 2y [J ES Y rjo VH = max{ c2o s + α2o[j s Y ESH rjo VL = max{ c2o s + α2o[j s O ESL JV Y ], cp 2y + αp 2y [JEP Y JV Y ]} JO VH ], cp 2o + αp 2o [JEPH O JO VH ] JVL O ], cp 2o + αp 2o [JEPL O JO VL ]} Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

39 The Search Model: Post-reforms Value functions Filled positions rjy EP = y 0 w y τy p + λ[p(jo EPH rj ES J EP Y ) + (1 p)(jepl + δ[jy V JEP Y ] Y = y 0 w y τy s + λ[p(max{jo EPH O } JES Y ) + (1 p)(max{jo EPL O + t[jy V JES Y ] rjo EPH = y wo h τo p + (δ + s p )[JO VH rjo ESH = y wo h τo s + (δ + t + s s )[JO VH rjo EPL = y 0 wo l τo p + (δ + s p )[JO VL rjo ESL = y 0 wo l τo s + (δ + t + s s )[JO VL O } JES Y )] + δ[jv Y JES Y ] JEPH O ] JESH O ] JEPL O ] JESL O ] J EP Y )] types Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

40 Equilibrium Wages wages Pre-reforms ( r + s w o = β[py + (1 p)y 0 τo p p ] + r ( ) u + (1 β)[s p ] r + d w y = β[y 0 τ p y ] + Post-reforms wo h = β[y τo p ] + (r + sp ) r wo l = β[y 0 τo s ] + (r + ss ) r w y = β[y 0 τy s (r + λ) ] + β r c2y s θ2y s λ ] r + (1 p)(1 β)(c2oθ s 2o) s ) ((1 β)b + βc p o θ p o) (r + λ) βcy p θy p λ r r ((1 β)b + βcp o θo) p ( ) ((1 β)b h + βc p u 2o θp 2o ) (1 β)sp r + d ( ) u (βc2oθ s 2o) s (1 β)s s r + d [ p((1 β)b h + βc p 2o θp 2o ) Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

41 Calibration calibration Parameter Pre reforms Post reforms r β p k y y co p co s 750 cy s 1000 τo p τo s 200 τy p 300 τy s 100 b u m d s p s s q p q s t 0.1 λ µ y µ o 0.18 µ h o µ l o 0.25 α y p 0.06 α y s 0.13 α o p α o s 0.11 Cristina Tealdi (NU / IMT Lucca) Employment contract reforms April 26,

Housing and the Labor Market: Time to Move and Aggregate Unemployment

Housing and the Labor Market: Time to Move and Aggregate Unemployment Peter Rupert 1 Etienne Wasmer 2 1 University of California, Santa Barbara 2 Sciences-Po. Paris and OFCE search class April 1, 2011