Labour Market Institutions and Amplification of Employment Fluctuations

Labour market reforms have been undertaken to eliminate labour market rigidities in European countries since 1970s. The important features of the reforms are the reduction in adjustment costs and the introduction of fixed-term contracts (FTC). Some empirical studies point out that employment fluctuations have become more volatile after the reforms. This paper presents a model with FTC and analyzes the effects of the key features of the reforms. Numerical examples show that an expected productivity shock causes the oscillatory behaviour of employment. Moreover, a reduction in adjustment costs amplifies fluctuations. In the labour market literature, a number of studies point out the importance of trade unions in European countries. This paper also analyzes the effects of union influence, and the numerical examples indicate that the stronger union influence leads to larger employment fluctuations.