The paper studies the macroeconomic impact of a reduction in firing costs and the introduction of temporary employment contracts. By using a general equilibrium model with labor market frictions in the presence of labor market institutions such as unemployment benefits and collective bargaining, the model generates an excess of dismissals compared with the optimal level ('inefficient separations'). A quantitative exercise on the Italian economy is then proposed.
The higher is the number of inefficient separations generated by labor market institutions, the higher is the optimal level of employment protection. The economic effects of a change in firing costs and the introduction of temporary contracts must then be assessed with respect to the difference between the current and optimal protection levels. The analysis shows that the firing costs in place in Italy before the reforms implemented after 2012 were significantly higher than the optimal level.
