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Cross-Skill Redistribution and the Tradeoff between Unemployment Benefits and Employment Protection

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Author Info

  • Boeri, Tito

    ()
    (Bocconi University)

  • Conde-Ruiz, J. Ignacio

    ()
    (FEDEA, Madrid)

  • Galasso, Vincenzo

    ()
    (Bocconi University)

Abstract

We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labor market risk. Different countries' locations along this trade-off represent stable, hard to modify, politico-economic equilibria. We develop a model in which voters are required to cast a ballot over the strictness of EPL, the generosity of UBs and the amount of redistribution involved by the financing of unemployment insurance. Agents are heterogeneous along two dimensions: employment status - insiders and outsiders - and skills - low and high. Unlike previous work on EPL, we model employment protection as an institution redistributing among insiders, notably in favour of the low-skill workers. A key implication of the model is that configurations with strict EPL and low UB should emerge in presence of compressed wage structures. Micro data on wage premia on educational attainments and on the strictness of EPL are in line with our results. We also find empirical support to the substantive assumptions of the model on the effects of EPL.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1371.

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Length: 38 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1371

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Keywords: employment protection; unemployment insurance; political equilibria;

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  1. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 99-29, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Conde-Ruiz, José Ignacio & Galasso, Vincenzo, 2000. "Early Retirement," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2589, C.E.P.R. Discussion Papers.
  3. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(3), pages 672-701, June.
  4. Conde-Ruiz, Jose Ignacio & Galasso, Vincenzo, 2005. "Positive arithmetic of the welfare state," Journal of Public Economics, Elsevier, Elsevier, vol. 89(5-6), pages 933-955, June.
  5. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(3), pages 699-726, August.
  6. 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, Royal Economic Society, vol. 109(455), pages 242-65, April.
  7. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
  8. Bertola, Giuseppe & Rogerson, Richard, 1997. "Institutions and labor reallocation," European Economic Review, Elsevier, Elsevier, vol. 41(6), pages 1147-1171, June.
  9. Gilles Saint Paul, 1998. "Assesing the political viability of labour market reform: The case of employment protection," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 346, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, Elsevier, vol. 8(2), pages 131-159, May.
  11. Boeri, Tito, 1998. "Enforcement of Employment Security Regulations, On-The-Job Search and Unemployment Duration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1850, C.E.P.R. Discussion Papers.
  12. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  13. Acemoglu, Daron & Aghion, Philippe & Violante, Giovanni L., 2001. "Deunionization, technical change and inequality," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 55(1), pages 229-264, December.
  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, CEPR;CES;MSH, vol. 16(32), pages 7-50, 04.
  15. Giuseppe BERTOLA & Tito BOERI & Sandrine CAZES, 2000. "Employment protection in industrialized countries: The case for new indicators," International Labour Review, International Labour Organization, International Labour Organization, vol. 139(1), pages 57-72, 03.
  16. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, Elsevier, vol. 34(4), pages 851-879, June.
  17. Ljungqvist, Lars & Sargent, Thomas J, 2002. "The European Employment Experience," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3543, C.E.P.R. Discussion Papers.
  18. Torsten Persson & Guido Tabellini, 2002. "Political Economics: Explaining Economic Policy," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262661314, December.
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