Capital market integration and optimal employment protection policies

Keisuke Kawata

No 3-9, IDEC DP2 Series from Hiroshima University, Graduate School for International Development and Cooperation (IDEC)

Abstract: This study analyzes the effect of capital markets integration on labor market policies. To that end, it incorporates imperfect labor markets into a tax competition model. There exist two types of households, types 1 and 2, that are risk-averse. Each type of household is endowed with one unit of a worker. Addi- tionally, households are endowed with capital. Type 2 households own lager amounts of capital than type 1 households. The government can choose the following policies: unemployment benefits and layoff, payroll, and capital subsidies or taxes. When capital markets are integrated, households can invest their capital in foreign capital markets. This study shows that the integration of capital markets leads to inefficient policies under which labor productivity is high, but income inequality within a country and the risk of job loss are also high. As a result, the social welfare of each country in integrated capital markets is lower than in non-integrated capital markets.

Keywords: Capital market integration; Unemployment risk; Labor market policies; Tax competition (search for similar items in EconPapers)
JEL-codes: F21 F66 H26 J63 J65 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2013-12
New Economics Papers: this item is included in nep-int
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