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Employment Dynamics and Redistributive Policies under Workers' Social Norms

  • Dos Santos Ferreira, Rodolphe

    ()

    (University of Strasbourg 3)

  • Lloyd-Braga, Teresa

    ()

    (Católica Lisbon)

  • Modesto, Leonor

    ()

    (Universidade Catolica Portuguesa, Lisbon)

We study employment dynamics using an OLG model with unemployment benefits and universal old-age survival pensions, both financed by taxing employed workers. The novelty is that we explicitly introduce workers' social norms that shape both the individual participation decision of workers and wage bargaining. We find that social norms increase the likelihood of multiplicity of equilibria and somewhat facilitate the emergence of indeterminacy and flip bifurcations, constituting therefore a source of business cycles driven by self-fulfilling volatile expectations, i.e. sunspots. We also find that, in the presence of strong social norms, standard policy recommendations that advocate a decrease in unemployment benefits in order to boost employment are no longer valid. Indeed, our simulation results show that the opposite will happen for empirically plausible levels of the unemployment rate.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7888.

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Length: 26 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:iza:izadps:dp7888
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  1. Jean-Michel Grandmont & P, A, Pintus & R, De Vilder, 1997. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Working Papers 97-28, Centre de Recherche en Economie et Statistique.
  2. Riham Barbar, 2010. "Leisure Externalities and Endogenous Cycles in an OLG Model," Documents de recherche 10-10, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  3. Lloyd-Braga, Teresa & Modesto, Leonor & Seegmuller, Thomas, 2011. "Market Distortions and Local Indeterminacy: A General Approach," IZA Discussion Papers 5603, Institute for the Study of Labor (IZA).
  4. Agell, J., 1998. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Papers 1998:17, Uppsala - Working Paper Series.
  5. Costas Azariadis & Been-Lon Chen & Chia-Hui Lu & Yin-Chi Wang, 2012. "A two-sector model of endogenous growth with leisure externalities," Working Papers 2012-045, Federal Reserve Bank of St. Louis.
  6. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May.
  7. Akerlof, George A, 1980. "A Theory of Social Custom, of Which Unemployment May be One Consequence," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 749-75, June.
  8. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
  9. Jess Benhabib & Roger Farmer, 1998. "The Monetary Transmission Mechanism," Levine's Working Paper Archive 2055, David K. Levine.
  10. Hedström, Peter & Kolm, Ann-Sofie & Åberg, Yvonne, 2003. "Social interactions and unemployment," Working Paper Series 2003:15, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  11. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  12. Assar Lindbeck & Sten Nyberg & Jšrgen W. Weibull, 1999. "Social Norms And Economic Incentives In The Welfare State," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 1-35, February.
  13. Andrew E. Clark, 2003. "Unemployment as a Social Norm: Psychological Evidence from Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 289-322, April.
  14. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  15. Pintea, Mihaela I., 2010. "Leisure externalities: Implications for growth and welfare," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1025-1040, December.
  16. Georg Duernecker, 2008. "To begrudge or not to begrudge: consumption and leisure externalities revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 15(4), pages 245-252.
  17. repec:fth:starer:9613 is not listed on IDEAS
  18. Kolm, Ann-Sofie, 2005. "Work norms and unemployment," Economics Letters, Elsevier, vol. 88(3), pages 426-431, September.
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