Endogenous Labor Market Insitutions in an Open Economy

Gabriel J Felbermayr (), Mario Larch () and Wolfgang Lechthaler

No Ifo Working Paper No. 108, Ifo Working Paper Series from Ifo Institute for Economic Research at the University of Munich

Abstract: The paper sets up a two-country asymmetric trade model with heterogeneous firms,search frictions and endogenous labor market institutions. Countries are linked by tradein goods and non-cooperatively set unemployment benefits to maximize national welfare.We show that more open and smaller economies have more generous unemploymentbenefit replacement rates as a larger fraction of the costs is borne by foreign tradingpartners. These results are in line with empirical stylized facts. Additionally, we findthat the optimal level of unemployment benefits is independent from the level of unemploymentbenefits abroad and that non-cooperatively set unemployment rates areinefficiently high.

Keywords: Endogenous labor market institutions; unemployment; international trade; search frictions; heterogeneous firms (search for similar items in EconPapers)
JEL-codes: F11 F12 F16 J64 L11 (search for similar items in EconPapers)
Date: 2011
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Journal Article: Endogenous labor market institutions in an open economy (2012)
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