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

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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 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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 834.

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Length: 42 pages
Date of creation: Jul 2003
Date of revision:
Handle: RePEc:iza:izadps:dp834

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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 99-29, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. 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.
  3. Acemoglu, Daron & Aghion, Philippe & Violante, Giovanni L, 2001. "Deunionization, Technical Change and Inequality," CEPR Discussion Papers 2764, C.E.P.R. Discussion Papers.
  4. Gilles Saint Paul, 1999. "The political economy of employment protection," Economics Working Papers 355, Department of Economics and Business, Universitat Pompeu Fabra.
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  7. Saint-Paul, Gilles, 1999. "Assessing the Political Viability of Labour Market Reform: The Case of Employment Protection," CEPR Discussion Papers 2136, C.E.P.R. Discussion Papers.
  8. Persson, Torsten & Tabellini, Guido, 1997. "Political Economics and Macroeconomic Policy," CEPR Discussion Papers 1759, C.E.P.R. Discussion Papers.
  9. J. Ignacio Conde-Ruiz & Vincenzo Galasso, . "Early retirement," Working Papers 2003-03, FEDEA.
  10. Alan B. Krueger & Bruce D. Meyer, 2002. "Labor Supply Effects of Social Insurance," NBER Working Papers 9014, National Bureau of Economic Research, Inc.
  11. 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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  13. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October.
  14. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  15. Garibaldi, Pietro, 1998. "Job flow dynamics and firing restrictions," European Economic Review, Elsevier, vol. 42(2), pages 245-275, February.
  16. J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2003. "Early Retirement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 12-36, January.
  17. 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.
  18. 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.
  19. Boeri, Tito, 1999. "Enforcement of employment security regulations, on-the-job search and unemployment duration," European Economic Review, Elsevier, vol. 43(1), pages 65-89, January.
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