Assessing the Political Viability of Labour Market Reform: The Case of Employment Protection

Gilles Saint-Paul

No 2136, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper develops a model of job creation and job destruction in a growing economy with embodied technical progress, that we use to analyze the political support for employment protection legislations such as the ones that are observed in most European countries. We analyze the possibility of Condorcet cycles due to the fact that workers about to become unemployed prefer both an increase and a reduction in firing costs over the status quo. Despite this problem, we show the existence of local, and sometimes global majority winners. In voting in favour of employment protection, incumbent employees trade off lower living standards (because employment protection maintains workers in less productive activities) against longer job duration. We show that the gains from, and consequently the political support for employment protection (as defined by maximum job tenure) are larger, the lower the rate of creative destruction and the larger the worker's bargaining power. Numerical simulations suggest a hump-shaped response of firing costs to these variables, as well as a negative impact of exogenous turnover on employment protection.

Keywords: Creative Destruction; Firing Costs; Obsolescence; Political Economy; Vintage Capital (search for similar items in EconPapers)
JEL-codes: E24 E6 J3 J6 (search for similar items in EconPapers)
Date: 1999-04
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Assessing the political viability of labor market reform: the case of employment protection (1999)
Working Paper: Assesing the political viability of labour market reform: The case of employment protection (1998)
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