Career Mobility in Dual Labor Markets

Many economies feature the co-existence of labor market contracts with different degrees of employment protection. The study presented in this Mannheim Applied Seminar shows how such duality affects the career mobility of workers in a labor market that is segmented along the occupation margin. Specifically, the authors develop a quantitative theory that sheds light on how duality affects aggregate productivity and unemployment through the channel of career mobility. The mechanism works through the equilibrium distribution of occupational tenure, which is endogenous to the labor market institutions, and which affects aggregate human capital. They explore various policy counterfactuals that address duality in a version of the model calibrated to Spanish labor market outcomes. They find that a policy reform that replaces duality by a unitary contract with lower employment protection can increase aggregate productivity through an increase of occupational mobility of unemployed workers. The sluggish reaction of the frictional labor market implies that along the transition induced by the reform, unemployment is increased in the short run.