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The Political Economy of Flexicurity

  • 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 labor market risk. Different countries' locations along this trade-off represent stable, hard to modify, politico-economic equilibria. We develop a model in which individuals determine the strictness of EPL and the size of a redistributive UB system in two distinct political environments. Agents are heterogeneous along two dimensions: employment status -insiders and outsiders - and skills - low and high. Unlike previous work on EPL, we model employment protection as an institution redistributing also among insiders, notably in favour of the low-skill workers. A key implication of the model is that flexicurity configurations with low EPL and high UB should emerge in presence of dispersed wage structures and progressive UB systems. Micro data on wage dispersion display correlations consistent with our results. The analysis of the experience of EPL reformers yields results which are in line with the relation between EPL and progressiveness of the UB system implied by our model.

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Paper provided by FEDEA in its series Working Papers with number 2006-15.

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Date of creation: Jul 2006
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Handle: RePEc:fda:fdaddt:2006-15
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  1. Bertola, Giuseppe & Rogerson, Richard, 1996. "Institutions and Labour Reallocation," CEPR Discussion Papers 1519, C.E.P.R. Discussion Papers.
  2. Tito Boeri & Pietro Garibaldi, 2007. "Two Tier Reforms of Employment Protection: A Honeymoon Effect?," Carlo Alberto Notebooks 37, Collegio Carlo Alberto.
  3. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
  4. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
  5. J. Ignacio Conde-Ruiz & Vincenzo Galasso, . "Positive Arithmetic of the Welfare State," Working Papers 2003-04, FEDEA.
  6. Tito Boeri & Axel Börsch-Supan & Guido Tabellini, 2001. "Would you like to shrink the welfare state? A survey of European citizens," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 7-50, 04.
  7. Acemoglu, Daron & Aghion, Philippe & Violante, Giovanni L., 2001. "Deunionization, technical change and inequality," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 55(1), pages 229-264, December.
  8. 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.
  9. John Roemer, 2003. "The Democratic Political Economy Of Progressive Income Taxation," Working Papers 9711, University of California, Davis, Department of Economics.
  10. Gilles Saint-Paul, 1999. "Assessing the political viability of labor market reform : the case of employment protection," Review, Federal Reserve Bank of St. Louis, issue May, pages 73-87.
  11. J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2003. "Early Retirement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 12-36, January.
  12. 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.
  13. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," Working papers 99-29, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  15. 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.
  16. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  17. Torsten Persson & Guido Tabellini, 2002. "Political Economics: Explaining Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661314, June.
  18. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October.
  19. Ljungqvist, Lars & Sargent, Thomas J, 2002. "The European Employment Experience," CEPR Discussion Papers 3543, C.E.P.R. Discussion Papers.
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