The Employment (and Output) of Nations: Theory and Policy Implications

Pietro Peretto

No 280, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: I study a model where firms bargain with unions over wages and employment levels. This interaction generates unemployment. Households take unemployment risk as given in making their participation decisions. I am thus able to study the interactions of product and labor market institutions in a three-states representation of the labor market. Unemployment matters because is inserts a wedge between labor supply (participation) and employment. Employment matters because it determines output. I uncover two feedback mechanisms, each reinforced by endogenous participation. The firt exploits the endogeneity of the number of firms to amplify the adverse effects on output of regulations and frictions that raise labor costs, work practice rigidities and the bargaining power of workers. The second exploits the endogeneity of market size to amplify the adverse effects of product market frictions that raise the costs of entry or of operation for firms. The multiplier effects due to these feedback mechanisms have interesting implications for the current policy debate. Labor market reforms that reduce the cost of labor are actually more attractive when one considers the endogenous structure of the product market. Similarly, pro-competitive product market reforms are more attractive when one considers the positive feedback on market structure that runs through the labor market

Keywords: product market; labor market; employment; unemployment (search for similar items in EconPapers)
JEL-codes: E6 J23 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-lab and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: The employment and output of Nations: Theory and policy implications (2021)
Working Paper: The Employment (and Output) of Nations: Theory and Policy Implications (2010)
Working Paper: The Employment (and Output) of Nations: Theory and Policy Implications (2006)
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