Two Tier Reforms of Employment Protection. A Honeymoon effect?

Labour market reforms increasing flexibility at the margin have been recently paying out in terms of employment growth. This article argues that two-tier labour market reforms have a transitional honeymoon, job creating effect. In a dynamic model of labour demand under uncertainty, the article predicts that in the aftermath of reforms, beyond an increase in employment, there should be a reduction in employment inaction and in the mean and cross-sectional variance of labour productivity. Based on a variety of firm-level data on Italy in the period 1995–2000, we find evidence of our empirical implications.