Contours of employment protection reform

Starting with a simple benchmark, we first derive the characteristics of optimal employment protection. In the benchmark, employment protection takes the form of layoff taxes, used to finance unemployment benefits. We then consider a number of extensions, and show how this principle must be modified and refined, but not abandoned. We then turn to the employment protection system in place in France today, and show that it differs from this principle in two main dimensions. First, contributions by firms to the unemployment insurance fund take the form of payroll taxes rather than layoff taxes. Second, the layoff process is subject to heavy administrative and judicial control. This leads us to make two main recommendations for reform: The introduction of a layoff tax, with a corresponding decrease in the payroll tax; and a reduced role of the judicial system in the layoff process. Keywords: employment protection, severance payments, layoffs, layoff taxes, unemployment insurance, unemployment contributions. JEL Classifications: J30, J32, J38, E62, H21.