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On the Political Economy of Labor Market Flexibility

  • Saint-Paul, G.

This paper starts from the observation that despite their very high levels of unemployment, major European countries have devoted few resources to reducing it. This suggests that there is little political concern about high unemployment. I develop a model where the government tries to increase employment by increasing labour market flexibility, and where any reform must pass majority voting. It is shown that the employed will block a complete reform of the labour market. A two-tier system will eventually generate consensus over the reform, however. In the long run, when the two-tier system prevails, political support gradually builds up in favour of further increases in flexibility. This creates a time-consistency problem, however, putting bounds on the reform that can be implemented ex ante . The model may generate complementarities between the economic system and the political system and lead to multiple equilibria. I also review various pieces of evidence, which lend support to the hypotheses brought up in the paper.

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Paper provided by DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number 93-02.

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Length: 46 pages
Date of creation: 1993
Date of revision:
Publication status: Published in NBER Macroeconomics Annual, 1993, pp. 151-195
Handle: RePEc:del:abcdef:93-02
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  1. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
  2. Mathias Dewatripont, 1992. "Economic Reform and Dynamic Political Constraints," ULB Institutional Repository 2013/175991, ULB -- Universite Libre de Bruxelles.
  3. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  4. Rebitzer, James B & Taylor, Lowell J, 1991. "A Model of Dual Labor Markets When Product Demand Is Uncertain," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1373-83, November.
  5. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  6. Saint-Paul, Gilles, 1991. "Dynamic labor demand with dual labor markets," Economics Letters, Elsevier, vol. 36(2), pages 219-222, June.
  7. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
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