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

  • Lehmann, Etienne


    (CRED, Université Panthéon Assas Paris 2)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2116.

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Length: 32 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2116
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  1. Yann Algan & Pierre Cahuc & André Zylberberg, 2002. "Public Employment and Labor Market Performances," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01017844, HAL.
  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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