On the Short-Run Effects of Labor Market Reforms
This paper evaluates the effects of introducing labor market flexibility into a small open economy characterized by tenure-increasing separation taxes. The model, which is calibrated to Argentinean observations, is subjected to different reforms: 1) the elimination of all separation costs, 2) the introduction of temporary contracts, and 3) the elimination of the separation costs from all new hires while freezing them on the workers that were hired prior to the reform. Contrary to the introduction of temporary contracts, which generate a sharp recessionary adjustment, the last type of partial reform is found to be an excellent second best alternative to a full reform.
