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A Positive Theory of Unemployment Insurance and Employment Protection

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  • Anesi, Vincent
  • De Donder, Philippe

Abstract

The objective of this paper is to provide a political economy explanation of the empirically observed negative correlation between employment protection and insurance. We study an economy composed of four groups of agents (capitalists, unemployed people, low- and high-skilled workers), each one represented by a politician. Politicians first form political parties and then compete in a winner-takes-all election by simultaneously proposing policy bundles composed of an employment protection level and an unemployment benefit. We first show that, in the absence of parties (i.e., in a citizen-candidate model), low-skilled workers are decisive and support a maximum employment protection level together with some unemployment benefit. We then obtain that, under some conditions, allowing for party formation results in all policy equilibria being in the Pareto set of the coalition formed by high-skilled workers together with unemployed people. Policies in this Pareto set exhibit a negative correlation between employment protection and unemployment benefit.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7333.

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Date of creation: Jun 2009
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Handle: RePEc:cpr:ceprdp:7333

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Keywords: bidimensional voting; citizen-candidate; flexicurity; labor market rigidities; party competition;

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References

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  1. Saint-Paul, Gilles, 1998. "A framework for analyzing the political support for active labor market policy," Journal of Public Economics, Elsevier, vol. 67(2), pages 151-165, February.
  2. Marco Pagano & Paolo Volpin, 1999. "The Political Economy of Corporate Governance," CSEF Working Papers 29, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2005.
  3. Gilles Saint Paul, 1998. "Assesing the political viability of labour market reform: The case of employment protection," Economics Working Papers 346, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Levy, Gilat, 2004. "A model of political parties," Journal of Economic Theory, Elsevier, vol. 115(2), pages 250-277, April.
  5. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2012. "The Political Economy Of Flexicurity," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 684-715, 08.
  6. Hassler, John & Rodriguez Mora, Jose V., 1999. "Employment turnover and the public allocation of unemployment insurance," Journal of Public Economics, Elsevier, vol. 73(1), pages 55-83, July.
  7. Val俽ie Smeets & Frederic Warzynski, 2003. "Job Creation, Job Destruction and Voting Behavior in Poland," LICOS Discussion Papers 13903, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  8. 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.
  9. Gilles Saint Paul, 1999. "The political economy of employment protection," Economics Working Papers 355, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Chung, Yoon-Kyung & Jeong, Jinook, 2008. "Analysis of employment protection laws and unemployment benefits," Economics Letters, Elsevier, vol. 99(1), pages 144-146, April.
  11. Pallage, Stephane & Zimmermann, Christian, 2001. "Voting on Unemployment Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 903-23, November.
  12. Woojin Lee & John E. Roemer, 2005. "The Rise and Fall of Unionised Labour Markets: A Political Economy Approach," Economic Journal, Royal Economic Society, vol. 115(500), pages 28-67, 01.
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Cited by:
  1. Kjell Erik Lommerud & Odd Rune Straume & Steinar Vagstad, 2012. "Employment protection and unemployment benefits: On technology adoption and job creation in a matching model," NIPE Working Papers 3/2012, NIPE - Universidade do Minho.
  2. Laszlo Goerke & Markus Pannenberg & Heinrich Ursprung, 2010. "A positive theory of the earnings relationship of unemployment benefits," Public Choice, Springer, vol. 145(1), pages 137-163, October.
  3. Potrafke, Niklas, 2010. "Labor market deregulation and globalization: Empirical evidence from OECD countries," Munich Reprints in Economics 19282, University of Munich, Department of Economics.

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