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.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu The Great Recession triggered a resurgence of short-time work (STW) throughout the OECD. Several countries introduced from scratch STW or significantly expanded the scope of the programmes already in place. In some countries like Italy, Japan and Germany between 2.5 and 5 per cent of the workforce participated in short-time work schemes at the trough of the recession. In this paper we analyse the rationale for short time work benefits and their effects on labour adjustment from both a cross-country and a time-series perspective. We find that STW actually contributed to reduce job losses during the Great Recession. However, the number of jobs saved, according to our macroeconomic estimates, is smaller than the full-time equivalents jobs involved by these programmes, pointing in some cases to sizeable deadweight costs. Other institutions, like plant-level bargaining over hours, wages and employment levels may be more effective than STW in encouraging adjustment along the intensive margins in presence of temporary shocks. Our results also suggest that STW cannot be readily extended to countries having much different institutional configurations as the demand for STW is very much affected by other institutions such as employment protection legislation and the degree of centralization of collective bargaining. The micro evidence from firm-level data in Germany is more encouraging as to the effectiveness of STW, pointing to rather moderate deadweight losses. We interpret this result as due to specific design features of the German STW that could make it more effective in addressing the moral hazard problems related to reliance on subsidised hour reductions. The German Kurzarbeit scheme is indeed discouraging 100 per cent hours reductions and is experience-rated. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S JEL Classification:J63, J65

The transition process differed in the countries of the Former Soviet Union (FSU) and those of Central and Eastern Europe (CEE) in terms of reallocation of labor real wage, employment and output adjustment. We sift through the theoretical and empirical literature to find an explanation for these diverging adjustment trajectories and conclude that they can be explained by the fact that the CEE countries adopted social policies that upheld wages at the bottom of the distribution forcing the old sector to restructure or collapse while the FSU countries allowed wages to free-fall not forcing the hand of the old sector.