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The political economy of employment protection

  • Gilles Saint Paul

This paper develops a model of job creation and job destruction in a growing economy with embodied technical progress, that we use to analyze the political support for employment protection legislations such as the ones that are observed in most European countries. We analyze the possibility of Condorcet cycles due to the fact that workers about to become unemployed prefer both an increase and a reduction in firing costs over the status quo. Despite this problem, we show the existence of local, and sometimes global majority winners. In voting in favour of employment protection, incumbent employees trade off lower living standards (because employment protection maintains workers in less productive activities) against longer job duration. We show that the gains from, and consequently the political support for employment protection (as defined by maximunjob tenure) are larger, the lower the rate of creative destruction and the larger the worker's bargaining power. Numerical simulations suggest a hump- shaped response of firing costs to these variables, as well as negative impact of exogeneous turnover on employment protection.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/355.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 355.

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Date of creation: Jan 1999
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Handle: RePEc:upf:upfgen:355
Contact details of provider: Web page: http://www.econ.upf.edu/

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