IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Uncertainty and the Politics of Employment Protection

  • Vindigni, Andrea

    (IMT Lucca and Collegio Carlo Alberto)

  • Scotti, Simone

    (University of Paris VII, Denis Diderot)

  • Tealdi, Cristina

    (IMT Lucca)

This paper investigates the role that idiosyncratic uncertainty plays in shaping social preferences over the degree of labor market flexibility, in a general equilibrium model of dynamic labor demand where the productivity of firms evolves over time as a Geometric Brownian mo- tion. A key result demonstrated is that how the economy responds to shocks, i.e. unexpected changes in the drift and standard deviation of the stochastic process describing the dynamics of productivity, depends on the power of labor to extract rents and on the status quo level of firing costs. In particular, we show that when firing costs are relatively low to begin with, a transition to a rigid labor market is favored by all and only the employed workers with idiosyncratic productivity below some threshold value. 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 relatively large rents. Moreover, we demonstrate that when the status quo level of firing costs is relatively high, the preservation of a rigid labor market is favored by the employed with intermediate productivity, whereas all other workers favor more flexibility. The coming of better economic conditions need not favor the demise of high firing costs in rigid high-rent economies, because "good times" cut down the support for flexibility among the least productive employed workers. The model 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 the persistence up to the present day.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.carloalberto.org/assets/working-papers/no.298.pdf
Download Restriction: no

Paper provided by Princeton University, Research Program in Political Economy in its series Papers with number 05-27-2008.

as
in new window

Length:
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:ecl:prirpe:05-27-2008
Contact details of provider: Web page: http://weblamp.princeton.edu/rppe/papers/papers.php

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series 481, Research Institute of Industrial Economics.
  2. Paul Oyer & Scott Schaefer, 2002. "Litigation Costs and Returns to Experience," American Economic Review, American Economic Association, vol. 92(3), pages 683-705, June.
  3. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  4. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228 National Bureau of Economic Research, Inc.
  5. Daron Acemoglu & Davide Ticchi & Andrea Vindigni, 2011. "Emergence And Persistence Of Inefficient States," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 177-208, 04.
  6. Amable, Bruno, 2003. "The Diversity of Modern Capitalism," OUP Catalogue, Oxford University Press, number 9780199261147, May.
  7. Adriana Kugler & Giovanni Pica, 2003. "Effects of employment protection and product market regulations on the Italian labor market," Economics Working Papers 722, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Julien Prat, 2006. "The Rate of Learning-by-Doing: Estimates from a Search-Matching Model," 2006 Meeting Papers 647, Society for Economic Dynamics.
  9. Stephen Morris & Stephen Coate, 1999. "Policy Persistence," American Economic Review, American Economic Association, vol. 89(5), pages 1327-1336, December.
  10. Gilles Saint Paul, 1999. "The political economy of employment protection," Economics Working Papers 355, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Saint-Paul, Gilles, 2004. "Did European Labor Makets Become more Competitive in the 1990's? Evidence from Estimated Worker Rents," IDEI Working Papers 266, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Tealdi, Cristina, 2011. "How do employment contract reforms affect welfare? Theory and evidence," MPRA Paper 33573, University Library of Munich, Germany.
  13. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 95-119.
  14. William Kerr & Adriana Kugler & David Autor, 2007. "Do Employment Protections Reduce Productivity? Evidence from U.S. States," Working Papers 07-04, Center for Economic Studies, U.S. Census Bureau.
  15. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
  16. Acemoglu, Daron & Robinson, James A, 1999. "Inefficient Redistribution," CEPR Discussion Papers 2122, C.E.P.R. Discussion Papers.
  17. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2005. "A Positive Theory Of Geographic Mobility And Social Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 263-303, 02.
  18. repec:pri:indrel:465 is not listed on IDEAS
  19. Björn Brügemann, 2007. "Employment protection: Tough to scrap or tough to get?," Economic Journal, Royal Economic Society, vol. 117(521), pages 386-415, 06.
  20. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
  21. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  22. Prat Julien, 2006. "Job Separation Under Uncertainty and the Wage Distribution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-34, January.
  23. Gilles Saint-Paul, 1993. "On the Political Economy of Labor Market Flexibility," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 151-196 National Bureau of Economic Research, Inc.
  24. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  25. MacLeod, W Bentley & Malcomson, James M & Gomme, Paul, 1994. "Labor Turnover and the Natural Rate of Unemployment: Efficiency Wage versus Frictional Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 276-315, April.
  26. 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.
  27. Caballero, Ricardo J. & Hammour, Mohamad L., 1998. "Jobless growth: appropriability, factor substitution, and unemployment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 51-94, June.
  28. Brugemann, Bjorn, 2006. "Does Employment Protection Create Its Own Political Support?," Working Papers 20, Yale University, Department of Economics.
  29. Coate, Stephen & Morris, Stephen, 1995. "On the Form of Transfers in Special Interests," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1210-35, December.
  30. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  31. Michael Pries & Richard Rogerson, 2005. "Hiring Policies, Labor Market Institutions, and Labor Market Flows," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 811-839, August.
  32. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295.
  33. Giuseppe Bertola, 1991. "Flexibility, Investment, and Growth," NBER Working Papers 3864, National Bureau of Economic Research, Inc.
  34. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2012. "The Political Economy Of Flexicurity," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 684-715, 08.
  35. Hernanz, Virginia & Jimeno, Juan F & Kugler, Adriana D., 2003. "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labour Market Reforms," CEPR Discussion Papers 3724, C.E.P.R. Discussion Papers.
  36. Andrea Vindigni, 2002. "Uncertainty and the Politics of Employment Protection," Working Papers 844, Princeton University, Department of Economics, Industrial Relations Section..
  37. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  38. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  39. Samuel Bentolila & Juan Jose Dolado & Juan F. Jimeno, 2008. "Two-tier Employment Protection Reforms: The Spanish Experience," CESifo DICE Report, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(4), pages 49-56, December.
  40. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
  41. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
  42. repec:iza:izadps:dp1067 is not listed on IDEAS
  43. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 217-272.
  44. Giuseppe Moscarini, 2005. "Job Matching and the Wage Distribution," Econometrica, Econometric Society, vol. 73(2), pages 481-516, 03.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ecl:prirpe:05-27-2008. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.