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Assessing the political viability of labor market reform : the case of employment protection

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  • Gilles Saint-Paul

Abstract

This paper develops a model of job creation and job destruction in a growing economy with embodied technical progress, that we use to analyze the political support for employment protection legislations such as the ones that are observed in most European countries. We analyze the possibility of Condorcet cycles due to the fact that workers about to become unemployed prefer both an increase and a reduction in firing costs over the status quo. Despite this problem, we show the existence of local, and sometimes global majority winners. In voting in favour of employment protection, incumbent employees trade off lower living standards (because employment protection maintains workers in less productive activities) against longer job duration. We show that the gains from, and consequently the political support for employment protection (as defined by maximum job tenure) are larger, the lower the rate of creative destruction and the larger the worker's bargaining power. Numerical simulations suggest a hump-shaped response of firing costs to these variables, as well as a negative impact of exogenous turnover on employment protection.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1999)
Issue (Month): May ()
Pages: 73-87

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Handle: RePEc:fip:fedlrv:y:1999:i:may:p:73-87:n:3

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Keywords: Labor market;

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  1. Caballero, R.J. & Hammour, M.L., 1991. "The Cleansing Effect of Recessions," Discussion Papers 1991_59, Columbia University, Department of Economics.
  2. Olivier Blanchard & Pedro Portugal, 1998. "What Hides Behind An Unemployment Rate: Comparing Portuguese and Us Unemployment," Working Papers w199803, Banco de Portugal, Economics and Research Department.
  3. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  4. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  5. Daniel Cohen & Arnaud Lefranc & Gilles Saint-Paul, 1997. "French unemployment: a transatlantic perspective," Economic Policy, CEPR & CES & MSH, vol. 12(25), pages 265-292, October.
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Cited by:
  1. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2006. "The Political Economy of Flexicurity," Working Papers 2006-15, FEDEA.
  2. Alberto Alesina & Silvia Ardagna & Vincenzo Galasso, 2010. "The Euro and Structural Reforms," NBER Chapters, in: Europe and the Euro, pages 57-93 National Bureau of Economic Research, Inc.
  3. Boeri, Tito & Conde-Ruiz, J. Ignacio & Galasso, Vincenzo, 2003. "Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?," IZA Discussion Papers 834, Institute for the Study of Labor (IZA).
  4. Luca Nunziata & Stefano Staffolani, 2001. "On Short-Term Contracts Regulations," Economics Papers 2001-W7, Economics Group, Nuffield College, University of Oxford.
  5. Boeri, Tito & Conde-Ruiz, J. Ignacio & Galasso, Vincenzo, 2004. "Cross-Skill Redistribution and the Tradeoff between Unemployment Benefits and Employment Protection," IZA Discussion Papers 1371, Institute for the Study of Labor (IZA).
  6. Vincent Anesi & Philippe De Donder, 2013. "A coalitional theory of unemployment insurance and employment protection," Economic Theory, Springer, vol. 52(3), pages 941-977, April.
  7. Anesi, Vincent & De Donder, Philippe, 2009. "A Positive Theory of Unemployment Insurance and Employment Protection," CEPR Discussion Papers 7333, C.E.P.R. Discussion Papers.

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