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Uncertainty and the Politics of Employment Protection

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  • Andrea Vindigni
  • Simone Scotti
  • Cristina Tealdi

Abstract

This paper investigates the social preferences over labor market exibility, in a general equilibrium model of dynamic labor demand. We demonstrate that how the economy responds to productivity shocks depends on the power of labor to extract rents and on the status quo level of the firing cost. In particular, we show that when the ring cost is initially relatively low, a transition to a rigid labor market is favored by all the employed workers with idiosyncratic productivity below some threshold value. Conversely, when the status quo level of the firing cost is relatively high, the preservation of a rigid labor market is favored by the employed with intermediate productivity, whereas all other workers favor more exibility. A more volatile environment, and a lower rate of productivity growth, i.e., "bad times," increase the political support for more labor market rigidity only where labor appropriates of relatively large rents. The coming of better economic conditions not necessarily favors the demise of high firing costs in rigid high-rents economies, because "good times" cut down the support for exibility among the least productive employed workers. The model described provides some new insights on the comparative dynamics of labor market institutions in the U.S. and in Europe over the last few decades, shedding some new light both on the reasons for the original build-up of "Eurosclerosis," and for its relative persistence until the present day.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 298.

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Length: 75 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:cca:wpaper:298

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Keywords: employment protection; job creation and destruction; firing cost; idiosyncratic productivity; volatility; growth; political economy; voting; rents; status quo; path dependency; institutional divergence.;

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  1. Hernanz, Virginia & Jimeno, Juan Francisco & Kugler, Adriana D., 2003. "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labour Market Reforms," CEPR Discussion Papers 3724, C.E.P.R. Discussion Papers.
  2. Brugemann, Bjorn, 2006. "Does Employment Protection Create Its Own Political Support?," Working Papers 20, Yale University, Department of Economics.
  3. Adriana Kugler & Giovanni Pica, 2003. "Effects of employment protection and product market regulations on the Italian labor market," Economics Working Papers 722, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Prat Julien, 2006. "Job Separation Under Uncertainty and the Wage Distribution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-34, January.
  5. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  6. Daron Acemoglu & Davide Ticchi & Andrea Vindigni, 2006. "Emergence and Persistence of Inefficient States," Carlo Alberto Notebooks 34, Collegio Carlo Alberto.
  7. Brugemann, Bjorn, 2006. "Employment Protection: Tough to Scrap or Tough to Get?," Working Papers 21, Yale University, Department of Economics.
  8. Michael Pries & Richard Rogerson, 2005. "Hiring Policies, Labor Market Institutions, and Labor Market Flows," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 811-839, August.
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  10. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295.
  11. Autor, David & Kerr, William & Kugler, Adriana, 2007. "Do Employment Protections Reduce Productivity? Evidence from U.S. States," IZA Discussion Papers 2571, Institute for the Study of Labor (IZA).
  12. Julien Prat, 2006. "The Rate of Learning-by-Doing: Estimates from a Search-Matching Model," 2006 Meeting Papers 647, Society for Economic Dynamics.
  13. Kugler, Adriana & Pica, Giovanni, 2003. "The effects of employment protection and product market regulations on the Italian labor market," Discussion Paper Series In Economics And Econometrics 0310, Economics Division, School of Social Sciences, University of Southampton.
  14. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  15. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  16. Paul Oyer & Scott Schaefer, 2002. "Litigation Costs and Returns to Experience," American Economic Review, American Economic Association, vol. 92(3), pages 683-705, June.
  17. Amable, Bruno, 2003. "The Diversity of Modern Capitalism," OUP Catalogue, Oxford University Press, number 9780199261147, September.
  18. Andrea Vindigni, 2002. "Uncertainty and the Politics of Employment Protection," Working Papers 844, Princeton University, Department of Economics, Industrial Relations Section..
  19. Giuseppe Moscarini, 2005. "Job Matching and the Wage Distribution," Econometrica, Econometric Society, vol. 73(2), pages 481-516, 03.
  20. Samuel Bentolila & Juan Jose Dolado & Juan F. Jimeno, 2008. "Two-tier Employment Protection Reforms: The Spanish Experience," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 6(4), pages 49-56, December.
  21. Tealdi, Cristina, 2011. "How do employment contract reforms affect welfare? Theory and evidence," MPRA Paper 33573, University Library of Munich, Germany.
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