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The Rise and Persistence of Rigidities

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  • Saint-Paul, Gilles

Abstract

In this paper we argue that employment protection legislation is more likely to arise when the rents earned by the employed over their alternative wage is greater. The model explains why economies with greater real wage rigidity also have greater employment protection. The model also predicts that lower turnover increases the political support for employment protection and that this political support is greater when employment protection is more harmful for employment. Also, rigidities are persistent as they create a constituency of low-productivity sectors whose workers would oppose the removal of firing costs, even though existing rents would not generate support for introducing them. We argue that tight labour markets due to post-war reconstruction needs in Europe made it easier for insiders to create such rents, which in turn led them to support employment protection legislation. In the late 1970s, rents started to fall but reforms proved difficult because of ratchet effects.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1571.

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Date of creation: Feb 1997
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Handle: RePEc:cpr:ceprdp:1571

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Related research

Keywords: Employment Protection; European Labour Markets; Political Economy; Rigidities; Unemployment;

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Cited by:
  1. Gersbach, Hans & Schniewind, Achim, 2001. "Awareness of General Equilibrium Effects and Unemployment," IZA Discussion Papers 394, Institute for the Study of Labor (IZA).
  2. Bernard Bartels, 2009. "The Monetary Transmission Mechanism in the Euro Area: A VAR-Analysis for Austria and Germany," Kiel Advanced Studies Working Papers, Kiel Institute for the World Economy 452, Kiel Institute for the World Economy.
  3. Ronnie Schoeb & David E. Wildasin, 2001. "Economic Integration and Labor Market Institutions: Worker Mobility, Earnings Risk, and Contract Structure," Labor and Demography, EconWPA 0112002, EconWPA.
  4. Nicola Acocella & Giovanni Di Bartolomeo, 2001. "Partisanship and fiscal policy co-ordination in a monetary union," Macroeconomics, EconWPA 0106003, EconWPA.
  5. repec:dgr:uvatin:2099001 is not listed on IDEAS
  6. Friedrich Heinemann & Theocharis Grigoriadis, 2013. "Origins of Reform Resistance and the Southern European Regime," WWWforEurope Working Papers series 20, WWWforEurope.
  7. Siebert, W. Stanley, 2006. "Labour Market Regulation in the EU-15: Causes and Consequences – A Survey," IZA Discussion Papers 2430, Institute for the Study of Labor (IZA).
  8. Pisauro, Giuseppe, 2002. "The beneficial effects of generous unemployment benefits on profits and employment," European Journal of Political Economy, Elsevier, vol. 18(4), pages 739-760, November.
  9. Cees Gorter & Jacques Poot, 1999. "The Impact of Labour Market Deregulation: Lessons from the," Tinbergen Institute Discussion Papers 99-001/3, Tinbergen Institute.
  10. Cees Gorter & Jacques Poot, 1998. "The impact of labour market deregulation: lessons from the "Kiwi" and "Polder" models," ERSA conference papers ersa98p481, European Regional Science Association.
  11. Friedrich Heinemann & Michael Förg & Eva Jonas & Eva Traut-Mattausch, 2008. "Psychologische Restriktionen wirtschaftspolitischer Reformen," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(4), pages 383-404, November.
  12. repec:dgr:uvatin:1999001 is not listed on IDEAS
  13. Belot, M.V.K., 2001. "Why is the Employment Protection Stricter in Europe than in the US?," Discussion Paper, Tilburg University, Center for Economic Research 2001-79, Tilburg University, Center for Economic Research.

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