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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standard policy recommendations that advocate a decrease in unemployment benefits in order to boost employment are no longer valid.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. 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.
  2. Agell, J., 1998. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Papers 1998:17, Uppsala - Working Paper Series.
  3. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  4. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  5. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.
  6. 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).
  7. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  8. Benhabib, Jess & Farmer, Roger E A, 1996. "The Monetary Transmission Mechanism," CEPR Discussion Papers 1404, C.E.P.R. Discussion Papers.
  9. George A. Akerlof, 1978. "A theory of social custom, of which unemployment may be one consequence," Special Studies Papers 118, Board of Governors of the Federal Reserve System (U.S.).
  10. Mihaela Pintea, 2006. "Leisure Externalities: Implications for Growth and Welfare," Working Papers 0609, Florida International University, Department of Economics.
  11. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  12. repec:fth:starer:9613 is not listed on IDEAS
  13. Azariadis, Costas & Chen, Been-Lon & Lu, Chia-Hui & Wang, Yin-Chi, 2013. "A two-sector model of endogenous growth with leisure externalities," Journal of Economic Theory, Elsevier, vol. 148(2), pages 843-857.
  14. 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.
  15. Kolm, Ann-Sofie, 2005. "Work norms and unemployment," Economics Letters, Elsevier, vol. 88(3), pages 426-431, September.
  16. 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.
  17. Hedström, Peter & Kolm, Ann-Sofie & Åberg, Yvonne, 2003. "Social Interactions and Unemployment," Working Paper Series 2003:18, Uppsala University, Department of Economics.
  18. 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.
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