Flexibility at the Margin and Labor Market Volatility in OECD Countries

We study the business-cycle behavior of segmented labor markets with flexibility at the margin (e.g., just affecting fixed-term contracts). We present a matching model with temporary and permanent jobs (i) where there is a gap in the firing costs associated with these types of jobs and (ii) where there are restrictions in the creation and duration of fixed-term contracts. We show that a labor market with "flexibility at the margin" increases the unemployment volatility with respect to one that is fully regulated. This analysis yields new insights into the interpretation of the recent volatility changes witnessed in the OECD area. © The editors of The Scandinavian Journal of Economics 2012.