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Capital market integration and optimal employment protection policies

Author

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  • Keisuke Kawata

    (Graduate School for International Development and Cooperation)

Abstract

This study analyzes the effect of capital markets integration on labor market policies. To that end, it incorporates imperfect labor markets into a tax competition model. There exist two types of households, types 1 and 2, that are risk-averse. Each type of household is endowed with one unit of a worker. Addi- tionally, households are endowed with capital. Type 2 households own lager amounts of capital than type 1 households. The government can choose the following policies: unemployment benefits and layoff, payroll, and capital subsidies or taxes. When capital markets are integrated, households can invest their capital in foreign capital markets. This study shows that the integration of capital markets leads to inefficient policies under which labor productivity is high, but income inequality within a country and the risk of job loss are also high. As a result, the social welfare of each country in integrated capital markets is lower than in non-integrated capital markets.

Suggested Citation

  • Keisuke Kawata, 2013. "Capital market integration and optimal employment protection policies," IDEC DP2 Series 3-9, Hiroshima University, Graduate School for International Development and Cooperation (IDEC).
    • Handle: RePEc:hir:idecdp:3-9
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Capital market integration; Unemployment risk; Labor market policies; Tax competition;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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