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Uncertainty and the politics of employment protection

Vindigni, Andrea and Scotti, Simone and Tealdi, Cristina Uncertainty and the politics of employment protection. EIC working paper series #6/2012 IMT Institute for Advanced Studies Lucca ISSN 2279-6894.

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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 firing 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 flexibility 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.

Item Type: Working Paper (EIC working paper series)
Additional Information: Updated May 2013
Uncontrolled Keywords: JEL Classification: D71, D72, E24, J41, J63, J65
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Research Area: Economics and Institutional Change
Depositing User: Ms T. Iannizzi
Date Deposited: 13 Nov 2012 09:44
Last Modified: 30 Jun 2014 08:55
URI: http://eprints.imtlucca.it/id/eprint/1427

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