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I would like to thank Pierre Cahuc, Luc Everaert, Olivier Jeanne, Francis Kramarz, Reza Moghadam, Francisco Nadal De Simone, Stefano Scarpetta, and the seminar participants at the IMF and the Ministry of Finance of France for helpful comments and discussions. I am very grateful to Bin Li for providing the program for simulations and Thomas Walter for editorial suggestions. Constanze Schulz-Calle La Rosa assisted with the formatting of the paper.
For example, for an employee with five years of seniority, severance pay is half of the monthly gross salary per year in the case of a dismissal for “personal” reasons and one month of salary in the case of a dismissal for “economic” reasons (OECD, 2005).
Kramarz and Michaud (2004) estimate that, for dismissals due to personal reasons, the average firing cost involving a worker with CDD is equivalent to 14 months’ wages and significantly higher in case of a collective dismissal. This suggests that dismissals due to economic reasons can be more costly, since, in the case of a dismissal for personal reasons, the firm and the worker often reach an agreement with high severance payments, thus avoiding the complex administrative and legal dismissal procedures.
CDDs were introduced in 1979. CDDs are also used for special employment programs targeting the young and the long-term unemployed. The worker is then qualified for unemployment benefits, which start at 57.4 percent of the previous gross salary (or 40 percent of the gross salary plus a fixed sum) but decrease over time, depending on the age and experience of the worker. This implies that workers can alternate between CDDs and unemployment spells, receiving unemployment benefits during the latter.
The maximum duration can be extended to 24 months in very special cases.
This phenomenon is shared by a large number of European countries.
These EPL characteristics are shared by many European economies.
When the job destruction rate is exogenous, labor market tightness (the vacancy–unemployment ratio θ) is independent of the unemployment rate u.
Opening a new job vacancy is not job creation; it is considered to be the opening of a job vacancy.
Hence, worker flows and job flows are assumed to be the same. According to Mortensen and Pissarides (1994), the introduction of on-the-job searching should not alter the main results of the model.
Alternatively, the steadystate condition can also be stated in terms of job flows instead of unemployment flows. Specifically, in the steady state, the rate of job creation (inflows into employment) equals the rate of job destruction (outflows from employment).
In this setup, wages are renegotiated continuously.
This can be interpreted as the firm and the worker having the same bargaining power.
Minimum wages in France apply to most wage earners, irrespective of age and occupation. As the government relied on increases in minimum wages to sustain consumption, minimum wages in France began to rise sharply in relation to the median wage after the second half of the 1960s and have stayed high since the mid-1980s, compared with its neighboring countries and the United States.