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Wage Rigidity or Fiscal Redistribution? The Unemployment Bias of Time Consistent Redistributive Policies

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  • Lehmann, Etienne

    () (CRED, Université Panthéon Assas Paris 2)

Abstract

Because of Time Inconsistency considerations, policymakers underestimate the drawbacks of wage rigidity as a redistributive tool. Consequently, they redistribute inefficiently income from high to low skilled workers. They typically implement too much wage rigidity whereas other means (in particular fiscal transfers) could achieve the same redistributive goal with less perverse effect on unemployment. Time inconsistency is more likely due to lack of credibility than to the short-term horizon of policymakers. Hence, policymaking processes should be reformed towards more transparent and binding agreements between government and social partners.

Suggested Citation

  • Lehmann, Etienne, 2006. "Wage Rigidity or Fiscal Redistribution? The Unemployment Bias of Time Consistent Redistributive Policies," IZA Discussion Papers 2116, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2116
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    References listed on IDEAS

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    1. Yann Algan & Pierre Cahuc & André Zylberberg, 2002. "Public employment and labour market performance," Economic Policy, CEPR;CES;MSH, vol. 17(34), pages 7-66, April.
    2. Agell, Jonas & Lommerud, Kjell Erik, 1997. "Minimum wages and the incentives for skill formation," Journal of Public Economics, Elsevier, vol. 64(1), pages 25-40, April.
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    More about this item

    Keywords

    wage rigidity; inequality; unemployment; time inconsistency;

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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