Job Protection, Industrial Relations and Employment

In a dynamic stochastic union model, we show that firing costs have a small and ambiguous impact on the level of employment if the union precommits to future wages. Further, in comparison with the commitment equilibrium and for very general union preferences, the no commitment equilibrium exhibits higher wages and a lower employment level. We argue that commitment-like equilibria are more likely in bargaining environments that feature social pacts at the aggregate level and cooperative industrial relations. Thus theoretical results suggest that these traits of the bargaining environment interact with employment protection legislation in a way that improves labour market performance. We provide evidence on OECD countries that is consistent with this prediction.