Abstract

There is now substantial evidence that high employment protection leads to a sclerotic labor market, with low hiring and separation rates, and long unemployment duration.1 While this may not lead to high unemployment| because of the opposite e®ects of low °ows and high duration of the unem-ployment rate|it is likely to lead to both lower productivity and lower output. Reducing employment protection runs however into strong political op-position. The reason is simple: Those who are currently protected see them-selves as having more to lose than to gain from such a reduction. For this reason, governments have been reluctant to implement across-the-board de-creases in employment protection. Instead, they have either done little, or they have tried to reform at the margin, allowing for reduced protection for some new contracts, but not for existing ones. In France for example, ¯rms now can, under some conditions, hire workers for a ¯xed duration, at the end of which separation occurs with low separation costs. If workers are