Front Matter Page

Research Department

Authorized for distribution by Eduardo Borensztein

Contents

• Summary

• I. Introduction

• II. A Brief Look at the Evidence

• III. Mandatory Notice and Job Security Provisions

• IV. Description of the Model

• V. The Model

  • A. Job Creation and Wage Determination

  • B. On the Timing of Advance Notice

  • C. Equilibrium with Advance Notice

• VI. Simulations

• VII. Discussions

• VII. Conclusions

• Tables:

• 1. Unemployment Flows Across Selected Countries

• 2. Job Turnover Across Selected Industrial Countries

• 3. Worker Turnover Across Selected Industrial Countries

• 4. Unemployment Inflows and Outflows

• 5. Strictness of Job Security in Selected Countries

• 6. Baseline Parameter Values

• 7. Simulation Statistics

• 8. Robustness Checks

• Figures:

• 1. Bad Jobs Over Market Tightness for Different τ^*

• 2. Surplus W^gOver Market Tightness for Different Notice Times τ^*

• 3. Value of a Good Job over Notice Time h, δ=δ^*

• 4. Equilibrium Market Tightness θ for Different Notice Times, τ^*

• 5. The Effect of an Increase in τ^* on Equilibrium Unemployment

• 6. Job Flows for Different Notice Times, τ^*

• 7. Unemployment for Different Notice Times, τ^*

• Appendices:

• I. Some Comparative Static Results

• II. Productivity Losses and Advance Notice

• III. Necessary Conditions

• IV. Sufficient Conditions

• References

SUMMARY

This paper shows that advance notice is an important determinant of the relationship between unemployment duration, job turnover, and on the job search. Empirically, unemployment inflows and outflows are much larger in North America than in Europe, and marked differences in unemployment flows appear consistent with the view that high job security provisions in Europe reduce unemployment turnover and increase the average duration of unemployment. However, existing evidence on gross job flows shows that job turnover (the sum of job creation and destruction) in highly regulated European markets is as high as turnover in North American markets. This paper argues that the existence of advance notice in European labor markets, along with other institutions that transform the job separation into a time-consuming process, can potentially be consistent with both sets of observations.

The paper introduces advance notice in a search-unemployment environment, and assumes that employer-initiated job separation can take place only when workers are given an institutionally determined advance notice. When jobs are subject to idiosyncratic uncertainty, firms would issue advance notice even when business conditions are favorable. The paper shows that such precautionary policy is not pursued only if it entails sufficiently high productivity losses. The length of the advance notice affects inflows and outflows into unemployment, and has ambiguous effects on equilibrium unemployment. In addition, advance notice affects labor market flows in two opposite ways. On the one hand, advance notice reduces firms’ incentive to create jobs, reduces inflows into unemployment, and increases the average duration of unemployment. On the other hand, advance notice increases the stock of employed job seekers, and increases the number of job to job movements. As a result, turnover in highly regulated markets can be as high as turnover in unregulated markets, while the corresponding unemployment flows are much smaller.