Replacing Dual Employment Protection by a Single Labour Contract * Juan J. Dolado † European University Institute Etienne Lalé ‡ University of Bristol Nawid Siassi § University of Konstanz Abstract The dual labour markets of Southern Europe and France create a “revolving door” through which many workers – especially youths – rotate between dead-end jobs and unemployment. The problem lies in the difference between the costs of firing workers on permanent versus temporary contracts. This column proposes a framework for evaluating what the optimal single contract should look like taking account of transitional issues and political economy constraints. One of the main rationales for having Employment Protection Legislation (EPL) is that, through fostering job stability, it can insure workers against job losses in the absence of perfect capital markets. In addition, EPL reduces moral hazard by employers who fail to internalize the cost of unemployment imposed on taxpayers. Both issues are particularly relevant in the dual labour markets of Southern Europe and France. It is well known that the dysfunctional performance of these labour markets has not been due to the coexistence of permanent (PC) and temporary contracts (TC). After all, the use of TC to accom- modate for the fixed-term nature of many seasonal activities is widespread in most countries. What really matters is the so-called EPL gap: the difference between the stringent EPL (defined as days of wages per year of service: d.w.y.s. hereafter) applied to longer-tenured workers and the very low compensation (if any) that other workers receive at the end of their short-term contracts. 1 * This column is based on CEPR discussion paper no. 11030, “Moving towards a single labour contract: Transition vs. steady-state.”, available at the web address . † Address: Department of Economics, Villa San Paolo, Via della Piazzuola 43, 50133 Florence, Italy – Phone: [+39] 055 4685 956/954 – Email: juan.dolado@eui.eu ‡ Address: Department of Economics, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, United Kingdom – Phone: +44(0)117 331 7912 – E-mail: etienne.lale@bristol.ac.uk § Address: Department of Economics, University of Konstanz, Universitätsstraße 10, 78457 Konstanz, Germany – Phone: +49-7531-88-2197 – Email: nawid.siassi@uni-konstanz.de 1 See, inter alia, Cahuc and Postel-Vinay (2002), Dolado, García-Serrano and Jimeno (2002), Bentolila et al. (2012) and García Pérez and Osuna (2014).