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Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?

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  • Boeri, Tito
  • Conde-Ruiz, José Ignacio
  • Galasso, Vincenzo

Abstract

We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labour market risk. The mix of quantity restrictions and price regulations adopted by the various countries would seem to correspond to a stable politico-economic equilibrium. We develop a model in which voters are required to cast a ballot over the strictness of EPL and over the generosity of UB. Agents are heterogeneous along two dimensions: employment status — there are insiders and outsiders — and skills — low and high skills. We show that if there exists a majority of low-skill insiders, the voting game has a politico-economic equilibrium with low UB and high EPL; otherwise, the equilibrium features high UB and low EPL. Another testable implication of the model is that a larger share of elderly workers increases the demand for EPL. Panel data on institutions and on the age and educational structures of the populations are broadly in line with our results. We also find that those favouring EPL over UB in a public opinion poll carried in 2001 in Italy have precisely the same characteristics predicted by our model.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3990.

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Date of creation: Jul 2003
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Handle: RePEc:cpr:ceprdp:3990

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Keywords: employment protection; political equilibria; unemployment insurance;

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References

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  1. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  2. Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc.
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  6. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
  7. Conde-Ruiz, J.I. & Galasso, V., 2000. "Early Retirement," Economics Working Papers eco2000/24, European University Institute.
  8. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
  9. Gilles Saint-Paul, 1999. "Assessing the political viability of labor market reform : the case of employment protection," Review, Federal Reserve Bank of St. Louis, issue May, pages 73-87.
  10. Mortensen, Dale T & Pissarides, Christopher A, 1999. "Unemployment Responses to 'Skill-Biased' Technology Shocks: The Role of Labour Market Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 242-65, April.
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  13. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392 Elsevier.
  14. Tito Boeri & Axel Börsch-Supan & Guido Tabellini, 2001. "Would you like to shrink the welfare state? A survey of European citizens," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 7-50, 04.
  15. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323, October.
  16. Boeri, Tito, 1998. "Enforcement of Employment Security Regulations, On-The-Job Search and Unemployment Duration," CEPR Discussion Papers 1850, C.E.P.R. Discussion Papers.
  17. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
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