Key definitions

Insiders: incumbent workers (with/without given seniority) who benefit of favorable work conditions
Outsiders: unemployed or workers employed in the secondary market (i.e., shadow, low-pay, temporary).
Key Idea: employed more numerous&better organised=>institutions respond to their interests (decisive voter)
Active Labour Market Policies: gvt programmes that intervene in L market to help unemployed find work
! Public Employment Services (job centres), Training schemes, Employm. subsidies (ST work prevent skill!)
! Advantages => more politically acceptable than controversial measures such as !employment protection
! Allow ! unemployment w/out exerting direct downward pressure on wages
! BUT=> ALMPs put long-term unemployed back into labor market=> ! wages (conflict of interest)
! ALMPs=> evidence shows seldomly effective => BUT, this doesnt seem to bother gvts=> WHY?!
! ALMPs designed to keep outsiders quiet=> prevent them from underbidding insiders (CoI)
! DE training for ST unemployed: merely"outside option for already employed=can bid up their wage
The political roots of labor market rigidities
Basic assumption: decisive voter (e.g., median) is employed (see Key Idea Above)
Assume that his/her welfare can be expressed as:
V=Pwe(1-t)+(1-P)wu where
P = probability of remaining employed
we = income when employed
wu = income when unemployed
t = tax paid by the employed
Hence, labor market institutions can influence the employed welfare through a number of channels:
1. Wage formation (we):
(we = outside option + rent = MPL firms rent)
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00=> "#$%&'( *+$&*,=> what he woulu get *#$%&'( of the fiim (i.e. if #,(-+.*/(')
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WR=> 0*12(13% 4(,$=> slice of suiplus fiom the match woikei can extiact bc &,%&'(1 %$5$#%
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FR=> 6&1-3% 1(,$=> poition of woikei piouuctivity kept by fiim
!
7 05/% foi L Naiket institutions to l wages (foi insiueis):
!
l 00 foi uecisive votei=> woikei gets moie elsewheie => (e.g. 89)
!
l WRl FR=> :-+.*/-(,$ +1*$(;$&*,=> l WR bc l cost of getting iiu of him
!
l NPL=>l+1*'#;$&<&$/: NW changes NPL thiu %#=%$&$#$&*,&;*-+.(-(,$51&$/ -(;>5,&%-%
2. Exposure (wu): As long as P<1, also the employed are exposed to unemployment
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If employeu exposeu to unemplo.=> policies affecting welfaie of unemployeu also affect employeu's
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The ? (@+*%(' to unemployment the ?%#++*1$ foi policies that benefit the unemployeu
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Remembei=> policies that benefit unemployeu=policies that l unemployment
S. Turnover (P): This interacts with exposure effect on how the employed are sympathetic with unemployed
- Institutions that " P=> ! employeds support for institutions that "wu.
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Institutions that lwu => l suppoit foi institutions that l P
!
A*-+.(-(,$51&$&(% acioss institutions
4. Tax (t): Institutions also affect taxation (through both direct and indirect effects)
- '&1(;$ tax cost of the institution consiueieu: an l in unemployment benefits has to be B&,5,;('.
- &,'&1(;$ effects : any policy l unemployment=> associateu with l $5@ +1(%%#1(
Firing costs directly affect both insiders rent and the turnover rate (P)
Minimum wage (assuming that median voter earns more) indirectly affects wage and taxes
Unemployment benefits directly affect insiders outside option, taxes, and exposure to unemployment (wu)
NB C,%$&$#$&*,% heie means policies
(eg. Fiiing costsmin. wage0B)
A>5,,(.% ! ambiti nei quali le istituzioni
hanno conseguenze
0>&;> ;>5,,(.% -*1( 1(.(<5,$Dneeueu to seeinst. chosen by &,;#-=(,$ (-+.*/((% electoially
- Applicatino of more than one policy instrument=> different options
EF Unemployment Benefit+Autonomous institution used to manipulate wages (e.g. minimum wage)
! What level of UB/autonomous wage institution?
! He will choose UB high, b/c his wage is not affected and if fired his advantage is higher
! Will choose the highest wage possible through collective bargaining
GF Only Unemployment Benefits:
! For LT an " in UB=> ! wages (" taxes) (while in the above case he could block this ! in wages)
Winners and losers
- Singe rigidities are not welfare improving=> somebody else must lose
! Assume: DV is member of group un/semi-skilled worker=> benefit most from L market regulations and WS
! Redistribution of L market institutions occurs in favour of this group according to following principles:
! Institutions that restrict employment of unskilled workers (firing costs)=> " their wages at expense of
! Those factors that are complementary in production with unskilled labour (skilled labour&capital)
! BUT => capital fairly mobile => so it is skilled labour that is expropriated
! If institution works through OO (e.g. unemployment benefits)=> the institution is advantageous to:
! ST unemployed and to unskilled employed (high UB=> can bid up their wages)
! LT unemployed lose as their job prospects are worsened
! If institution works through rent (Firing costs)=> benefits employed and harms unemployed
! BUT=> within limits; Employed do not support infinite firing costs=> may force firms into
bankruptcy; unemployed do not favour 0 FC if gain in terms of higher job creation too small
compared to the gain in terms of lower job destruction
! Although harms unempl., it is skilled labour and capital that winds up paying for transfer of res.
- If inst leads firms to spend less on recruiting=> Redistribution may be at the expense of unemployed
- Resources not spent on recruiting are spend in the form of higher wages
- How could this occur=> effect of FC in a world of costly search and recruiting
Institutions, politics, and the economic environment
Many reforms that !unemployment are unpopular=> harm employed; but why does gvt have any interest?!
- (My idea)=> dont want social conflict to reach too high levels
- Because wants to appear as competent in tackling an issue (political support effect)
- No contradiction about gvt willing to reach a goal by means that are unpopular
How do economic Variables affect incentives for Reform?
! How Unemployment level/composition affects incentives for reform
! Unemployment " tax burden of employed=> DV wants to reduce it (tax effect)
! Portion of DV does not change if unemployment concentrated amongst least skilled
! BUT if employed heterogeenous: characteristics of employed DV changes (may want to!unem)
! " unemployment=> ! insiders=> for any given level of L demand=> insiders can afford higher
wages while preserving their jobs (e.g. employment protection&high unemployment) => wants to" it
! Ambiguous=> last effect (insider effect) moves in opposite direction to support and tax effect
! Turnover Rate:
! When DVs P is lower: lower support for policies that "welfare of employed and!welfare of unemployed
! Related more to the change in employment than to its level
! When employment is ! => employed " exposed (Even though unemployed level is low)
! When employment "=> employed ! exposed (even if unemployment level is high)
! Identifiability Recessions and Political Hysteresis:
! Many polices through which insiders manage to " welfare have effect of ! employment
! DV more likely to support the institution if it is the status quo than if it is the proposed reform
! In reform=> you dont know who the loser will be=> reluctance to support it (may themselves!)
! Recessions=> vote on reform is after the recession
! Because it is at the beginning of an expansionary phase=> DV thinks reform wont jeopardise job
! Support for reform will be high=> losers as easily identified as under the status quo
! Suggests that political system os a channel of hysteresis in unemployment
! After recession, when U highest: large political support for institutions that"real wages&U
! Elasticity of Labour Demand:
! The"the Elasticity of Labour demand => ! political support for institutions that allow wages to be bid up
!
Flat demand curve => ! " minimum wage=> firing of employees
Reform design
Many reforms that would ! unemployment are unpopular because they would remove benefits for insiders
Thats why most reforms are designed to act at the margin: leaving existing employees unaffected
- May lead to a two-tier system=>Primary Sector (protected&high-pay workers) Secondary (LT temps)
HI*JH&(1 K/%$(-%
- Affect decomposition of society into conflicting interest groups
- Secondary tier created by the reform => different interests from the original employees
- Attempts to limit political influence => !deregulated system is often limited to (!size)
- pecific targeted groups; restrictions of use (temporary)/whole reform is designed as temporary
L51$&%5, 5%+(;$% MN how uo political paities affect the uesign of laboui maiket institutions.
!
K$15&O>$P*1I51'=> RW biaseu 5O5&,%$ laboui (foi flexible L maiket); LW P*1 laboui (foi iegulation)
!
98H:
!
RW policies may be unueitaken by LW anu <&;( <(1%5
!
LW moie likely to convince public of %*;&5. =(,(B&$ of a ;*,%(1<5$&<( 1(P*1- than RW
!
=> solving an &-+*1$5,$ %*;&5. +1*=.(- iathei than acting on +51$&%5, .*O&;
!
If RW *,./ 1(+1(%(,$(' Q=> piobably ,(<(1 ;*-( $* +*I(1
!
Bave to be iepiesentative of some laboui => piesumably -*%$ %2&..('
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0ppose institutions uisti. Skilleu=>unskilleu; may favoui K=> laboui; 0nemployeu=>Skilleu
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0ncleai which paity iepiesents the +**1(%$ anu #,(-+.*/('
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0nemployeu may siue w iich:e.g. policies =(,(B&$ #,%2&..(' & haim %2&..(' (eg fiiing costs)
!
98H: paity is a +5;25O( *P +*.&;&(%=> unemployeu unlikely to suppoit all of RW's policies
!
Also, 0nemployeu have an &,$1&,%&; &,$(1(%$ &, ;>5,O(=> i.e. a ,(I %($ *P ;51'%
!
Tenu to vote foi the paity not in powei, iegaiuless of its coloui
!
K$1*,O C'(*.*O/=> ueteiminant of policy ielative to othei factois (e.g. economic factois)
!
Stiongly iueological gvt will ,*$ ;51( 5=*#$ +51$&;#.51 -(5%#1(% =(&,O #,+*+#.51
!
Bc measuie taken pait of a O.*=5. anu ;*,%&%$(,$ vision of what has to be unueitaken
!
Thatchei
!
Suggests that above pieuictions only holu foi I(52./ &'(*.*O&;5. O*<(1,-(,$%