This dissertation examines key dynamics of European labour markets, focusing on job security, labour market adjustments in response to economic shocks, and retention policies. It consists of three independent but related essays.
The first chapter develops a directed search model with aggregate uncertainty and risk-averse workers to analyse dual labour markets, where firms compete for workers through wages and contract types. The model predicts that hiring into open-ended contracts is pro-cyclical: during expansions, firms favour open-ended contracts to benefit from wage savings, whereas during downturns, they shift towards fixed-term contracts to preserve firing flexibility. This aligns with empirical evidence from three European economies. Furthermore, the model shows that open-ended contracts can serve as a strategic tool for firms to attract workers, creating a composition effect whereby workers self-select into more secure positions at high-productivity firms.
The second chapter, joint with Cristina Lafuente, investigates the impact of Short-Time Work (STW) schemes during the COVID-19 crisis. Using labour market data from four EU economies, we find that STWs played a crucial role in preventing job losses. However, they were less effective in protecting temporary workers. We also find an increase in transitions from employment to non-participation, as well as a drop in flows between temporary and permanent jobs, the latter suggesting a decline in labour market mobility.
The third chapter, joint with Edouard Challe, evaluates the efficiency of employment subsidies versus job retention schemes in a random search-and-matching model with human capital depreciation during unemployment and endogenous job destruction. Unlike in models with exogenous job destruction, employment subsidies are insufficient to correct for the inefficiency of the decentralised allocation; welfare can be further improved through job retention schemes that limit excess job destruction and turnover.
Together, these essays contribute to the understanding of labour market institutions and policy effectiveness in European labour markets.