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Uncertainty and the Politics of Employment Protection

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  • Andrea Vindigni
  • Simone Scotti
  • Cristina Tealdi

Abstract

This paper investigates the social preferences over labor market exibility, in a general equilibrium model of dynamic labor demand. We demonstrate that how the economy responds to productivity shocks depends on the power of labor to extract rents and on the status quo level of the firing cost. In particular, we show that when the ring cost is initially relatively low, a transition to a rigid labor market is favored by all the employed workers with idiosyncratic productivity below some threshold value. Conversely, when the status quo level of the firing cost is relatively high, the preservation of a rigid labor market is favored by the employed with intermediate productivity, whereas all other workers favor more exibility. A more volatile environment, and a lower rate of productivity growth, i.e., "bad times," increase the political support for more labor market rigidity only where labor appropriates of relatively large rents. The coming of better economic conditions not necessarily favors the demise of high firing costs in rigid high-rents economies, because "good times" cut down the support for exibility among the least productive employed workers. The model described provides some new insights on the comparative dynamics of labor market institutions in the U.S. and in Europe over the last few decades, shedding some new light both on the reasons for the original build-up of "Eurosclerosis," and for its relative persistence until the present day.

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  • Andrea Vindigni & Simone Scotti & Cristina Tealdi, 2013. "Uncertainty and the Politics of Employment Protection," Carlo Alberto Notebooks 298, Collegio Carlo Alberto.
  • Handle: RePEc:cca:wpaper:298
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    Cited by:

    1. Yves Achdou & Jiequn Han & Jean-Michel Lasry & Pierre-Louis Lions & Benjamin Moll, 2017. "Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach," NBER Working Papers 23732, National Bureau of Economic Research, Inc.
    2. Vincent Anesi & Philippe De Donder, 2013. "A coalitional theory of unemployment insurance and employment protection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(3), pages 941-977, April.
    3. repec:oup:oxecpp:v:69:y:2017:i:1:p:143-164. is not listed on IDEAS

    More about this item

    Keywords

    employment protection; job creation and destruction; firing cost; idiosyncratic productivity; volatility; growth; political economy; voting; rents; status quo; path dependency; institutional divergence.;

    JEL classification:

    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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