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On the Political Economy of Labor Market Flexibility

In: NBER Macroeconomics Annual 1993, Volume 8

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  • Gilles Saint-Paul

Abstract

This paper starts from the observation that despite their very high levels of unemployment, major European countries have devoted few resources to reducing it. This suggests that there is little political concern about high unemployment. I develop a model where the government tries to increase employment by increasing labour market flexibility, and where any reform must pass majority voting. It is shown that the employed will block a complete reform of the labour market. A two-tier system will eventually generate consensus over the reform, however. In the long run, when the two-tier system prevails, political support gradually builds up in favour of further increases in flexibility. This creates a time-consistency problem, however, putting bounds on the reform that can be implemented ex ante . The model may generate complementarities between the economic system and the political system and lead to multiple equilibria. I also review various pieces of evidence, which lend support to the hypotheses brought up in the paper.

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This chapter was published in:

  • Olivier Blanchard & Stanley Fischer, 1993. "NBER Macroeconomics Annual 1993, Volume 8," NBER Books, National Bureau of Economic Research, Inc, number blan93-1, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11000.

    Handle: RePEc:nbr:nberch:11000

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    1. Rebitzer, James B & Taylor, Lowell J, 1991. "A Model of Dual Labor Markets When Product Demand Is Uncertain," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1373-83, November.
    2. Dewatripont, M & Roland, G, 1992. "Economic Reform and Dynamic Political Constraints," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 703-30, October.
    3. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
    4. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
    5. 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.
    6. Saint-Paul, Gilles, 1991. "Dynamic labor demand with dual labor markets," Economics Letters, Elsevier, vol. 36(2), pages 219-222, June.
    7. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
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