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A Positive Theory of Unemployment Insurance and Employment Protection

  • Anesi, Vincent
  • De Donder, Philippe

The objective of this paper is to provide a political economy explanation of the empirically observed negative correlation between employment protection and insurance. We study an economy composed of four groups of agents (capitalists, unemployed people, low- and high-skilled workers), each one represented by a politician. Politicians first form political parties and then compete in a winner-takes-all election by simultaneously proposing policy bundles composed of an employment protection level and an unemployment benefit. We first show that, in the absence of parties (i.e., in a citizen-candidate model), low-skilled workers are decisive and support a maximum employment protection level together with some unemployment benefit. We then obtain that, under some conditions, allowing for party formation results in all policy equilibria being in the Pareto set of the coalition formed by high-skilled workers together with unemployed people. Policies in this Pareto set exhibit a negative correlation between employment protection and unemployment benefit.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7333.

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Date of creation: Jun 2009
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Handle: RePEc:cpr:ceprdp:7333
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  1. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
  2. 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.
  3. Pallage, Stephane & Zimmermann, Christian, 2001. "Voting on Unemployment Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 903-23, November.
  4. Hassler, John & Rodriguez Mora, Jose V., 1999. "Employment turnover and the public allocation of unemployment insurance," Journal of Public Economics, Elsevier, vol. 73(1), pages 55-83, July.
  5. Marco Pagano & Paolo Volpin, 1999. "The Political Economy of Corporate Governance," CSEF Working Papers 29, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2005.
  6. Woojin Lee & John E. Roemer, 2005. "The Rise and Fall of Unionised Labour Markets: A Political Economy Approach," Economic Journal, Royal Economic Society, vol. 115(500), pages 28-67, 01.
  7. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2006. "The Political Economy of Flexicurity," Working Papers 2006-15, FEDEA.
  8. Gilat Levy, 2004. "A model of political parties," LSE Research Online Documents on Economics 540, London School of Economics and Political Science, LSE Library.
  9. Saint-Paul, Gilles, 1995. "A Framework for Analysing the Political Support for Active Labour Market Policy," CEPR Discussion Papers 1205, C.E.P.R. Discussion Papers.
  10. Smeets, Valerie & Warzynski, Frederic, 2003. "Job Creation, Job Destruction and Voting Behavior in Poland," Working Papers 03-24, University of Aarhus, Aarhus School of Business, Department of Economics.
  11. Daniel Cohen & Arnaud Lefranc & Gilles Saint-Paul, 1997. "French unemployment: a transatlantic perspective," Economic Policy, CEPR;CES;MSH, vol. 12(25), pages 265-292, October.
  12. Chung, Yoon-Kyung & Jeong, Jinook, 2008. "Analysis of employment protection laws and unemployment benefits," Economics Letters, Elsevier, vol. 99(1), pages 144-146, April.
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