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On the Political Economy of Industrial, Labor and Social Reforms as Complements

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  • Antonio Estache
  • Renaud Foucart

Abstract

We study the coordination between industrial, labor and social policy when voting determines policy choices. Firms choose to invest in either an old or a new sector. Most workers have skills constraining them to work in the old sector. A minority of workers are more productive in the new sector, and choose to be active where they expect a higher wage. Aggregate surplus is higher if firms invest in both sectors and workers are employed where they are the most productive. We identify conditions for such a modernized economy to develop. First, any labor policy must give workers enough bargaining power to have incentives to find the right job. Second, for an industrial policy to stimulate the new sector, a social policy involving both workers and firms must compensate the losers of modernization. Third, policies must be delegated to a social planner able to commit to the joint implementation of reforms and transfers.

Suggested Citation

  • Antonio Estache & Renaud Foucart, 2018. "On the Political Economy of Industrial, Labor and Social Reforms as Complements," Working Papers ECARES 2018-13, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/270985
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    Cited by:

    1. Guillaume Wilemme, 2021. "Optimal Taxation to Correct Job Mismatching," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 170-197, April.
    2. Antonio Estache & Beni Kouevi Gath, 2019. "Corporate Income Taxes and (Un-)Employment in the OECD," Working Papers ECARES 2019-11, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    bargaining power; industrial policy; voting;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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