DP803 On the Political Economy of Labour Market Flexibility
| Author(s): | Gilles Saint-Paul |
| Publication Date: | August 1993 |
| Keyword(s): | Determined Duration Contracts, Labour Market Flexibility, Political Economy, Unemployment |
| JEL(s): | D72, D74, D78, E24, J63, J64 |
| Programme Areas: | International Macroeconomics, Human Resources |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=803 |
This paper starts from the observation that despite their very high levels of unemployment, major European countries have devoted few resources to reducing it. This suggests that there is little political concern about high unemployment. I develop a model where the government tries to increase employment by increasing labour market flexibility, and where any reform must pass majority voting. It is shown that the employed will block a complete reform of the labour market. A two-tier system will eventually generate consensus over the reform, however. In the long run, when the two-tier system prevails, political support gradually builds up in favour of further increases in flexibility. This creates a time-consistency problem, however, putting bounds on the reform that can be implemented