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.