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Key definitions

• Insiders: incumbent workers (with/without given seniority) who benefit of favorable work conditions
• Outsiders: unemployed or workers employed in the secondary market (i.e., shadow, low-pay, temporary).
Key Idea: employed more numerous&better organised=>institutions respond to their interests (decisive voter)
Active Labour Market Policies: gvt programmes that intervene in L market to help unemployed find work
! Public Employment Services (job centres), Training schemes, Employm. subsidies (ST work prevent skill!)
! Advantages => more politically acceptable than controversial measures such as !employment protection
! Allow ! unemployment w/out exerting direct downward pressure on wages
! BUT=> ALMPs put long-term unemployed back into labor market=> ! wages (conflict of interest)
! ALMPs=> evidence shows seldomly effective => BUT, this doesn’t seem to bother gvts=> WHY?!
! ALMPs designed to keep outsiders ‘quiet’=> prevent them from underbidding insiders (CoI)
! DE training for ST unemployed: merely"outside option for already employed=can bid up their wage
The political roots of labor market rigidities
• Basic assumption: decisive voter (e.g., median) is employed (see Key Idea Above)
• Assume that his/her welfare can be expressed as:
V=Pwe(1-t)+(1-P)wu where
– P = probability of remaining employed
– we = income when employed
– wu = income when unemployed
– t = tax paid by the employed
Hence, labor market institutions can influence the employed welfare through a number of channels:
1. Wage formation (we):
(we = outside option + rent = MPL – firm’s rent)
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00=> "#$%&'( *+$&*,=> what he woulu get *#$%&'( of the fiim (i.e. if #,(-+.*/(')
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WR=> 0*12(13% 4(,$=> slice of suiplus fiom the match woikei can extiact b¡c &,%&'(1 %$5$#%
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FR=> 6&1-3% 1(,$=> poition of woikei piouuctivity kept by fiim
!
7 05/% foi L Naiket institutions to l wages (foi insiueis):
!
l 00 foi uecisive votei=> woikei gets moie elsewheie => (e.g. 89)
!
l WR¡l FR=> :-+.*/-(,$ +1*$(;$&*,=> l WR b¡c l cost of getting iiu of him
!
l NPL=>l+1*'#;$&<&$/: NW changes NPL thiu %#=%$&$#$&*,&;*-+.(-(,$51&$/ -(;>5,&%-%
2. Exposure (wu): As long as P<1, also the employed are exposed to unemployment
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If employeu exposeu to unemplo.=> policies affecting welfaie of unemployeu also affect employeu's
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The ? (@+*%(' to unemployment the ?%#++*1$ foi policies that benefit the unemployeu
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Remembei=> policies that benefit unemployeu=policies that l unemployment
S. Turnover (P): This interacts with exposure effect on how the employed are “sympathetic” with unemployed
- Institutions that " P=> ! employed’s support for institutions that "wu.
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Institutions that lwu => l suppoit foi institutions that l P
!
A*-+.(-(,$51&$&(% acioss institutions
4. Tax (t): Institutions also affect taxation (through both direct and indirect effects)
- '&1(;$ tax cost of the institution consiueieu: an l in unemployment benefits has to be B&,5,;('.
- &,'&1(;$ effects : any policy l unemployment=> associateu with l $5@ +1(%%#1(
– Firing costs directly affect both insiders’ rent and the turnover rate (P)
– Minimum wage (assuming that median voter earns more) indirectly affects wage and taxes
– Unemployment benefits directly affect insiders’ outside option, taxes, and exposure to unemployment (wu)
NB C,%$&$#$&*,% heie means policies
(eg. Fiiing costs¡min. wage¡0B)
A>5,,(.% ! ambiti nei quali le istituzioni
hanno conseguenze
0>&;> ;>5,,(.% -*1( 1(.(<5,$Dneeueu to see哪个inst. chosen by &,;#-=(,$ (-+.*/((% electoially
- Applicatino of more than one policy instrument=> different options
EF Unemployment Benefit+Autonomous institution used to manipulate wages (e.g. minimum wage)
! What level of UB/autonomous wage institution?
! He will choose UB high, b/c his wage is not affected and if fired his advantage is higher
! Will choose the highest wage possible through collective bargaining
GF Only Unemployment Benefits:
! For LT an " in UB=> ! wages (" taxes) (while in the above case he could block this ! in wages)
Winners and losers
- Singe rigidities are not welfare improving=> somebody else must lose
! Assume: DV is member of group un/semi-skilled worker=> benefit most from L market regulations and WS
! Redistribution of L market institutions occurs in favour of this group according to following principles:
! Institutions that restrict employment of unskilled workers (firing costs)=> " their wages at expense of
! Those factors that are complementary in production with unskilled labour (skilled labour&capital)
! BUT => capital fairly mobile => so it is skilled labour that is expropriated
! If institution works through OO (e.g. unemployment benefits)=> the institution is advantageous to:
! ST unemployed and to unskilled employed (high UB=> can bid up their wages)
! LT unemployed lose as their job prospects are worsened
! If institution works through rent (Firing costs)=> benefits employed and harms unemployed
! BUT=> within limits; Employed do not support infinite firing costs=> may force firms into
bankruptcy; unemployed do not favour 0 FC if gain in terms of higher job creation too small
compared to the gain in terms of lower job destruction
! Although harms unempl., it is skilled labour and capital that winds up paying for transfer of res.
- If inst leads firms to spend less on recruiting=> Redistribution may be at the expense of unemployed
- Resources not spent on recruiting are spend in the form of higher wages
- How could this occur=> effect of FC in a world of costly search and recruiting
Institutions, politics, and the economic environment
Many reforms that !unemployment are unpopular=> harm employed; but why does gvt have any interest?!
- (My idea)=> don’t want social conflict to reach too high levels
- Because wants to appear as competent in tackling an issue (political support effect)
- No contradiction about gvt willing to reach a goal by means that are unpopular
How do economic Variables affect incentives for Reform?
! How Unemployment level/composition affects incentives for reform
! Unemployment " tax burden of employed=> DV wants to reduce it (tax effect)
! Portion of DV does not change if unemployment concentrated amongst least skilled
! BUT if employed heterogeenous: characteristics of employed DV changes (may want to!unem)
! " unemployment=> ! insiders=> for any given level of L demand=> insiders can afford higher
wages while preserving their jobs (e.g. employment protection&high unemployment) => wants to" it
! Ambiguous=> last effect (insider effect) moves in opposite direction to support and tax effect
! Turnover Rate:
! When DV’s P is lower: lower support for policies that "welfare of employed and!welfare of unemployed
! Related more to the change in employment than to its level
! When employment is ! => employed " exposed (Even though unemployed level is low)
! When employment "=> employed ! exposed (even if unemployment level is high)
! Identifiability Recessions and Political Hysteresis:
! Many polices through which insiders manage to " welfare have effect of ! employment
! DV more likely to support the institution if it is the status quo than if it is the proposed reform
! In reform=> you don’t know who the loser will be=> reluctance to support it (may themselves!)
! Recessions=> vote on reform is after the recession
! Because it is at the beginning of an expansionary phase=> DV thinks reform won’t jeopardise job
! Support for reform will be high=> losers as easily identified as under the status quo
! Suggests that political system os a channel of hysteresis in unemployment
! After recession, when U highest: large political support for institutions that"real wages&U
! Elasticity of Labour Demand:
! The"the Elasticity of Labour demand => ! political support for institutions that allow wages to be bid up
!
Flat demand curve => ! " minimum wage=> firing of employees
Reform design
• Many reforms that would ! unemployment are unpopular because they would remove benefits for insiders
• That’s why most reforms are designed to act at the margin: leaving existing employees unaffected
- May lead to a two-tier system=>Primary Sector (protected&high-pay workers) Secondary (LT temps)
HI*JH&(1 K/%$(-%
- Affect decomposition of society into conflicting interest groups
- Secondary tier created by the reform => different interests from the original employees
- Attempts to limit political influence => !deregulated system is often limited to (为了!size)
- pecific targeted groups; restrictions of use (temporary)/whole reform is designed as temporary
L51$&%5, 5%+(;$% MN how uo political paities affect the uesign of laboui maiket institutions.
!
K$15&O>$P*1I51'=> RW biaseu 5O5&,%$ laboui (foi flexible L maiket); LW P*1 laboui (foi iegulation)
!
98H:
!
RW policies may be unueitaken by LW anu <&;( <(1%5
!
LW moie likely to convince public of %*;&5. =(,(B&$ of a ;*,%(1<5$&<( 1(P*1- than RW
!
=> solving an &-+*1$5,$ %*;&5. +1*=.(- iathei than acting on +51$&%5, .*O&;
!
If RW *,./ 1(+1(%(,$(' Q=> piobably ,(<(1 ;*-( $* +*I(1
!
Bave to be iepiesentative of some laboui => piesumably -*%$ %2&..('
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0ppose institutions uisti. Skilleu=>unskilleu; may favoui K=> laboui; 0nemployeu=>Skilleu
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0ncleai which paity iepiesents the +**1(%$ anu #,(-+.*/('
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0nemployeu may siue w¡ iich:e.g. policies =(,(B&$ #,%2&..(' & haim %2&..(' (eg fiiing costs)
!
98H: paity is a +5;25O( *P +*.&;&(%=> unemployeu unlikely to suppoit all of RW's policies
!
Also, 0nemployeu have an &,$1&,%&; &,$(1(%$ &, ;>5,O(=> i.e. a ,(I %($ *P ;51'%
!
Tenu to vote foi the paity not in powei, iegaiuless of its coloui
!
K$1*,O C'(*.*O/=> ueteiminant of policy ielative to othei factois (e.g. economic factois)
!
Stiongly iueological gvt will ,*$ ;51( 5=*#$ +51$&;#.51 -(5%#1(% =(&,O #,+*+#.51
!
B¡c measuie taken pait of a O.*=5. anu ;*,%&%$(,$ vision of what has to be unueitaken
!
Thatchei
!
Suggests that above pieuictions only holu foi I(52./ &'(*.*O&;5. O*<(1,-(,$%