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Growth, Unemployment and Tax/Benefit system in European Countries

Author

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  • Quintero-Rojas, Coralia
  • Adjemian, Stéphane
  • Langot, François

Abstract

This paper analyzes how the frictions in the labor market simultaneously affect the economic growth and the long run unemployment. To this goal, we develop a Schumpeterian model of endogenous growth: agents have the choice of being employed or being doing R&D activities. Unemployment is caused by the wage-setting behavior of unions. We show that: (i) High labor costs or powerful trade unions lead to higher unemployment and lower economic growth. (ii) Efficient bargain allows to increase employment, at the price of a lower growth rate. These theoretical predictions are consistent with our empirical analysis based on 183 European Regions, between 1980-2003. Finally, in a welfare exercise, we show that the optimal growth rate can be reached by compensating the distortions on the goods-sector due to the growth process with the distortions induced by the labor market rigidities.

Suggested Citation

  • Quintero-Rojas, Coralia & Adjemian, Stéphane & Langot, François, 2008. "Growth, Unemployment and Tax/Benefit system in European Countries," MPRA Paper 7909, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:7909
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    References listed on IDEAS

    as
    1. Philippe Aghion & Peter Howitt, 1994. "Growth and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 477-494.
    2. Alberto Alonso & Cristina Echevarria & Kien C. Tran, 2004. "Long-Run Economic Performance and the Labor Market," Southern Economic Journal, Southern Economic Association, vol. 70(4), pages 905-919, April.
    3. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 48-104.
    4. Lingens, Jorg, 2003. "The impact of a unionised labour market in a Schumpeterian growth model," Labour Economics, Elsevier, vol. 10(1), pages 91-104, February.
    5. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    6. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084, Elsevier.
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    Keywords

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    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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