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This Annex presents the details and derivations of the extended model of Section F. It discusses, in turn, the firms’ optimization problem, the workers’ optimization problem, and the model’s equilibrium and comparative statics.
Prepared by Ioannis Halikias.
The increase brought the minimum wage from 41 to 51½ of the average wage, the highest ratio in the EU; see IMAD (2014). The minimum wage increase was phased in gradually to limit the burden on the labor market.
It should be noted that student work makes up 15–20 percent of Slovenia’s employment in the 15–29 age group.
Shares, rather than absolute levels, are used to correct for the impact of the cycle.
Note that in this framework there is no ambiguity relating to the high 2014 base, as these are conditional frequencies, i.e. they capture the probability of transitioning to an open-ended contract conditional on being in a temporary contract in the previous period.
There could be further unintended consequences of the reform which however cannot be captured by our data. For instance, Cahuc et. al. (2016) document that taxation of temporary jobs in France also induced a shortening of the average temporary contract duration.
The restriction of zero expected utility for the unemployed (needed to obtain closed-form solutions), together with the free entry/zero profit condition, have the implication that payroll taxes drop out from the model’s equilibrium conditions. In order to meaningfully analyze the impact of this policy variable, the utility of the unemployed had to be endogenized, and the model calibrated.
At the same time, when temporary contracts are widely used for work that would normally be done under open- ended contracts, unifying payroll taxes for both types of contracts helps avoid tax evasion.