Uncertainty and the Politics of Employment Protection

Abstract

This paper investigates the social preferences over labor market flexibility, 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 flexibility. 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.Keywords: employment protection, job creation and destruction, firing cost, idiosyncratic productivity, volatility, growth, political economy, voting, rents, status quo, path dependency, institutional divergence.JEL Classification: D71, D72, E24, J41, J63, J65.¦ We are especially grateful to Gilles Saint-Paul, Bjoern Bruegemann and two anonymous referees whose comments allowed us to improve significantly the quality of the paper, and the editor Christopher Taber for many valuable suggestions and insights. We also thank Daron Acemoglu, David Autor, Roland Bénabou, Olivier Blanchard, Tito Boeri, Ricardo Caballero, Robert Shimer, Iván Werning, for helpful comments. The usual disclaimer applies.X IMT Lucca and Collegio Carlo Alberto. Y LPMA, Université Paris 7 Diderot. § IMT Lucca.

Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach

“…See for exampleJovanovic (1979),Moscarini (2005),Alvarez and Shimer (2011),Moll (2014),Stokey (2014), Vindigni, Scotti, andTealdi (2014),Jones and Kim (2014),Jones (2015),Toda and Walsh (2015),Benhabib, Bisin, and Zhu (2016),Cao and Luo (2017) andKasa and Lei (2017) Luttmer (2007Luttmer ( , 2011Luttmer ( , 2015. andBenhabib, Perla, and Tonetti (2017) analyze theories with heterogeneous producers.…”

Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach

“…See for exampleJovanovic (1979),Moscarini (2005),Alvarez and Shimer (2011),Moll (2014),Stokey (2014),Vindigni, Scotti, and Tealdi (2014),Jones and Kim (2014),Jones (2015),Toda and Walsh (2015),Benhabib, Bisin, and Zhu (2016),Cao and Luo (2017) andKasa and Lei (2017) Luttmer (2007Luttmer ( , 2011Luttmer ( , 2015. andBenhabib, Perla, and Tonetti (2017) analyze theories with heterogeneous producers.…”

Should the Government Provide Jobs for Everyone? Societal Expectations and Their Impact on Labour Market Institutions and Outcomes

“…However, some authors argue that employed voters have in fact various levels of affective job insecurity and, in consequence, different policy preferences [Anderson, Pontusson, 2007]. The level of job insecurity depends on personal characteristics, especially job-specific and general human capital [Saint-Paul, 2002;Vindigni et al, 2015], the type of employment contract [Clark, Postel-Vinay, 2009], someone's occupation and the sector in which they operate [Fossati, 2014], and labour market institutions [Anderson, Pontusson, 2007;Giannelli et al, 2012]. The sense of job insecurity may also depend on the current labour market situation [Berglund et al, 2014;Blekesaune, 2007;Singer, 2013].…”

“…However, much less is known about why these institutions are (or are not) reformed and to what extent some regulations may be socially desired despite their negative impact on the labour market [Boeri, 2010]. Surprisingly, although a growing number of studies have attempted to answer these questions [Boeri et al, 2012;Lucifora, Moriconi, 2015;Vindigni et al, 2015], few researchers have analysed the empirical data describing the expectations of labour market participants concerning the conducted policy [Alesina et al, 2015;Parlevliet, 2017]. Therefore, the goal of this study is to assess to what extent individual preferences may help to explain the heterogeneity of labour market institutions among countries over a period of 10 to 20 years and to analyse how strongly the current labour market situation affects these preferences.…”