relation: http://eprints.imtlucca.it/1427/
title: Uncertainty and the politics of employment protection
creator: Vindigni, Andrea
creator: Scotti, Simone
creator: Tealdi, Cristina
subject: HB Economic Theory
subject: HD Industries. Land use. Labor
description: 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.
publisher: IMT Institute for Advanced Studies Lucca
date: 2012-11
type: Working Paper
type: NonPeerReviewed
format: application/pdf
language: en
identifier: http://eprints.imtlucca.it/1427/1/EIC_WP_6_2012.pdf
identifier:   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.