The Political Economy of Employment Protection

Universitat Pompeu Fabra Economics WP No. 355

Posted: 7 Jul 1999

See all articles by Gilles Saint-Paul

Gilles Saint-Paul

University of Toulouse I - GREMAQ-IDEI; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

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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 favor 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 negative impact of exogenous turnover on employment protection.

JEL Classification: E6, E24, J3, J6

Suggested Citation

Saint-Paul, Gilles, The Political Economy of Employment Protection. Universitat Pompeu Fabra Economics WP No. 355. Available at SSRN: https://ssrn.com/abstract=155909

Gilles Saint-Paul (Contact Author)

University of Toulouse I - GREMAQ-IDEI ( email )

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Centre for Economic Policy Research (CEPR)

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

IZA Institute of Labor Economics

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