Growth, Unemployment and Tax/Benefit system in European Countries

Coralia Quintero-Rojas, Stéphane Adjemian () and Francois Langot ()
Authors registered in the RePEc Author Service: Coralia Quintero Rojas ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes how the frictions in the labor market simultaneously affect the economic growth and the long run unemployment. To this goal, we develop a Schumpeterian model of endogenous growth: agents have the choice of being employed or being doing R&D activities. Unemployment is caused by the wage-setting behavior of unions. We show that: (i) High labor costs or powerful trade unions lead to higher unemployment and lower economic growth. (ii) Efficient bargain allows to increase employment, at the price of a lower growth rate. These theoretical predictions are consistent with our empirical analysis based on 183 European Regions, between 1980-2003. Finally, in a welfare exercise, we show that the optimal growth rate can be reached by compensating the distortions on the goods-sector due to the growth process with the distortions induced by the labor market rigidities.

Keywords: Endogenous growth; unemployment; labor market institutions; welfare (search for similar items in EconPapers)
JEL-codes: J51 E24 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Date: 2008-03-14
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