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Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?

  • Tito Boeri
  • J. Ignacio Conde-Ruiz
  • Vincenzo Galasso

We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labour market risk. The mix of quantity and price protective measures adopted by the various countries would seem to correspond to a stable politico-economic equilibrium. We develop a model in which voters are required to cast a ballot over the strictness of EPL and over the generosity of UB. Agents are heterogeneous along two dimensions: employment status -- there are insiders and outsiders -- and skills -- low and high ability. We show that if there exists a majority of low-ability insiders, the voting game has a politico- economic equilibrium with low UB and high EPL; otherwise, the equilibrium features high UB and low EPL. Another testable implication of the model is that a larger share of elderly workers increases the demand for EPL. Panel data on institutions and on the age and educational structures of the populations are broadly in line with our results. We also find that those favouring EPL over UB in a public opinion poll carried in 2001 in Italy have precisely the same characteristics predicted by our model.

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Paper provided by FEDEA in its series Working Papers with number 2003-17.

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Handle: RePEc:fda:fdaddt:2003-17
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  1. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  2. Boeri, Tito, 1998. "Enforcement of Employment Security Regulations, On-The-Job Search and Unemployment Duration," CEPR Discussion Papers 1850, C.E.P.R. Discussion Papers.
  3. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  4. 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.
  5. Conde-Ruiz, J.I. & Galasso, V., 2000. "Positive Arithmetic of the Welfare State," Economics Working Papers eco2000/23, European University Institute.
  6. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
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