Exploring Labor Market Institutions: A Political Economy Analysis

Abstract

In this paper, we argue that many of the rigidities that characterize European labor markets can be understood as the outcome of political influence by incumbent employees. We then empirically investigate the determinants of labor market institutions and show that the results are consistent with this view. Among other things, we find that higher exposure of the employed to unemployment facilitates a reduction of the level of employment protection, that unemployment benefits are lower the more employment reacts to wages and that a higher level of unemployment and a right-wing government slow down the growth rate of the minimum wage.

JEL Classification: E24, H53, J6