Efficiency and Equality in the Labour Market
CESifo Economic Studies, 2004, vol. 50, issue 2, 255-278
I review theoretical arguments suggesting that certain labour market institutions can be justified for economic efficiency reasons. In models with intrinsic market failures, "rigidities" like employment protection legislation and institutional wage compression may push the economy closer to the efficient frontier. I discuss recent empirical evidence on income inequality, poverty and income mobility in OECD countries, and I conclude that the welfare states of Northern Europe score relatively well on all counts. Finally, I discuss labour market reforms that may improve efficiency without violating European voters' preference for equality.(JEL H30, J30, J50)
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