Market and Political Power Interactions in Greece: A Theory
In recent years the growth pattern of Greece has been disturbed, as this country is suffering from a persisting economic crisis that goes beyond the usual business cycle. In this paper, we develop a neo- classical growthmodel of market and political power interactions that explains this crisis. The model incorporates the insiders-out siders labor market structure and the concept of an elite government. Outsiders form a group of workers that supply labor to a competitive private sector. And, insiders form a group of workers that enjoy market power in supplying labor to the public sector and influence the policy decisions of government, including those that affect the development and maintenance of public sector infrastructures. This leads to labor misallocation and inefficient fiscal policies. Despite the fact that expanding public sector output has a positive effect on growth, eventually this is counterbalanced by the labor misallocation and inefficient tax policy outcomes. Thus, the deep and sustained growth reversal occurring in Greece is explained as a consequence of the organizational structure of the labor market, that has important implications on the workings of the economic and political systems.
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