Employment Protection Legislation Matters for the Phillips Curve

Liberal reforms of employment protection legislation (EPL) aim at fostering the flexibility, dynamism and fluidity of the labor market without increasing unemployment. A New Keynesian model with search-and-matching frictions implies that such type of reforms have also a direct impact on the structural relationship between prices and unemployment, i.e. the Phillips Curve (PC). We assess empirically the existence of this channel considering 19 episodes of EPL reforms across 13 countries. Consistently with the theory, countries that experienced an employ- ment protection liberalization witnessed a flattening of the PC just after the reform