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Employment Dynamics and Redistributive Policies under Workers' Social Norms

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  • Dos Santos Ferreira, Rodolphe

    ()
    (University of Strasbourg 3)

  • Lloyd-Braga, Teresa

    ()
    (Católica Lisbon)

  • Modesto, Leonor

    ()
    (Universidade Catolica Portuguesa, Lisbon)

Abstract

We study employment dynamics using an OLG model with unemployment benefits and universal old-age survival pensions, both financed by taxing employed workers. The novelty is that we explicitly introduce workers' social norms that shape both the individual participation decision of workers and wage bargaining. We find that social norms increase the likelihood of multiplicity of equilibria and somewhat facilitate the emergence of indeterminacy and flip bifurcations, constituting therefore a source of business cycles driven by self-fulfilling volatile expectations, i.e. sunspots. We also find that, in the presence of strong social norms, standard policy recommendations that advocate a decrease in unemployment benefits in order to boost employment are no longer valid. Indeed, our simulation results show that the opposite will happen for empirically plausible levels of the unemployment rate.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7888.

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Length: 26 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:iza:izadps:dp7888

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Keywords: flip bifurcations; local indeterminacy; steady state multiplicity; sunspots; workers' social norms; unemployment benefits;

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  1. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
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  7. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  8. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
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  10. Hedström, Peter & Kolm, Ann-Sofie & Åberg, Yvonne, 2003. "Social interactions and unemployment," Working Paper Series 2003:15, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  11. Azariadis, Costas & Chen, Been-Lon & Lu, Chia-Hui & Wang, Yin-Chi, 2013. "A two-sector model of endogenous growth with leisure externalities," Journal of Economic Theory, Elsevier, vol. 148(2), pages 843-857.
  12. Georg Duernecker, 2008. "To begrudge or not to begrudge: consumption and leisure externalities revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 15(4), pages 245-252.
  13. Agell, Jonas, 1999. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Economic Journal, Royal Economic Society, vol. 109(453), pages F143-64, February.
  14. Akerlof, George A, 1980. "A Theory of Social Custom, of Which Unemployment May be One Consequence," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 749-75, June.
  15. Assar Lindbeck & Sten Nyberg & Jšrgen W. Weibull, 1999. "Social Norms And Economic Incentives In The Welfare State," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 1-35, February.
  16. Kolm, Ann-Sofie, 2005. "Work norms and unemployment," Economics Letters, Elsevier, vol. 88(3), pages 426-431, September.
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