Uncertainty and the Politics of Employment Protection

Andrea Vindigni, Simone Scotti and Cristina Tealdi

No 298, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper investigates the social preferences over labor market exibility, in a general equilibrium model of dynamic labor demand. We demonstrate that how the economy responds to productivity shocks depends on the power of labor to extract rents and on the status quo level of the firing cost. In particular, we show that when the ring cost is initially relatively low, a transition to a rigid labor market is favored by all the employed workers with idiosyncratic productivity below some threshold value. Conversely, when the status quo level of the firing cost is relatively high, the preservation of a rigid labor market is favored by the employed with intermediate productivity, whereas all other workers favor more exibility. A more volatile environment, and a lower rate of productivity growth, i.e., "bad times," increase the political support for more labor market rigidity only where labor appropriates of relatively large rents. The coming of better economic conditions not necessarily favors the demise of high firing costs in rigid high-rents economies, because "good times" cut down the support for exibility among the least productive employed workers. The model described provides some new insights on the comparative dynamics of labor market institutions in the U.S. and in Europe over the last few decades, shedding some new light both on the reasons for the original build-up of "Eurosclerosis," and for its relative persistence until the present day.

Keywords: employment protection; job creation and destruction; firing cost; idiosyncratic productivity; volatility; growth; political economy; voting; rents; status quo; path dependency; institutional divergence. (search for similar items in EconPapers)
JEL-codes: D71 D72 E24 J41 J63 J65 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2013
New Economics Papers: this item is included in nep-cdm, nep-dge and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Uncertainty and the Politics of Employment Protection (2015)
Working Paper: Uncertainty and the Politics of Employment Protection (2013)
Working Paper: Uncertainty and the Politics of Employment Protection (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:298

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