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Employment Dynamics and Redistributive Policies under Workers' Social Norms

Rodolphe Dos Santos Ferreira (), Teresa Lloyd-Braga () and Leonor Modesto ()

No 7888, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study employment dynamics using an OLG model with unemployment benefits and universal old-age survival pensions, both financed by taxing employed workers. The novelty is that we explicitly introduce workers' social norms that shape both the individual participation decision of workers and wage bargaining. We find that social norms increase the likelihood of multiplicity of equilibria and somewhat facilitate the emergence of indeterminacy and flip bifurcations, constituting therefore a source of business cycles driven by self-fulfilling volatile expectations, i.e. sunspots. We also find that, in the presence of strong social norms, standard policy recommendations that advocate a decrease in unemployment benefits in order to boost employment are no longer valid. Indeed, our simulation results show that the opposite will happen for empirically plausible levels of the unemployment rate.

Keywords: flip bifurcations; local indeterminacy; steady state multiplicity; sunspots; workers' social norms; unemployment benefits (search for similar items in EconPapers)
JEL-codes: E32 H23 H31 J65 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-01
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-soc
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Published as "The destabilizing effects of the social norm to work under a social security system" in Mathematical Social Sciences, 2015, 76, 64-72

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