IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Unemployment and Labor-Market Reform: A Contract Theoretic Approach

Listed author(s):
  • Grüner, Hans Peter


    (University of Mannheim)

Registered author(s):

    Why do many democracies fail to reform their labor market institutions? We study the feasibility of reforms that include the compensation of the insiders for the removal of labor market regulations. In our model workers differ in their ability to perform well on a liberalized labor market. The workers’ ability is unobservable for the government. This informational asymmetry generates additional costs for a government that wants to implement a compensation package together with a labor market reform. Under asymmetric information, a reformer who wants to ’’buy’’ the approval of voters has to pay them an informational rent in addition to the pure costs of compensation that would arise under symmetric information. In this setting unemployment may be constrained Pareto-efficient. Consequently, no reform is accepted unanimously by voters. We show that this result can further be strengthened: under majority voting labor market reforms may fail politically because there exists no reform package that gets the approval of a majority of voters. Our model explains the emergence of political deadlocks where low rates of unemployment can be removed in the political process while high rates of unemployment tend to be politically stable.

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below under "Related research" whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 49.

    in new window

    Date of creation: Jul 1999
    Publication status: published in: Scandinavian Journal of Economics, 2002, 104 (4), 641-656, see IZA Reprints 181/03
    Handle: RePEc:iza:izadps:dp49
    Contact details of provider: Postal:
    IZA, P.O. Box 7240, D-53072 Bonn, Germany

    Phone: +49 228 3894 223
    Fax: +49 228 3894 180
    Web page:

    Order Information: Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp49. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.