Cross-Skill Redistribution and the Trade-Off between Unemployment Benefits and Employment Protection

39 Pages Posted: 30 Dec 2004

See all articles by Tito Boeri

Tito Boeri

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

J. Ignacio Conde-Ruiz

Foundation for Applied Economic Research (FEDEA)

Vincenzo Galasso

University of Lugano; Centre for Economic Policy Research (CEPR)

Date Written: October 2004

Abstract

We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labor market risk. Different countries' locations along this trade-off represent stable, hard to modify, politico-economic equilibria. We develop a model in which voters are required to cast a ballot over the strictness of EPL, the generosity of UBs and the amount of redistribution involved by the financing of unemployment insurance. Agents are heterogeneous along two dimensions: employment status - insiders and outsiders - and skills - low and high. Unlike previous work on EPL, we model employment protection as an institution redistributing among insiders, notably in favor of the low-skill workers. A key implication of the model is that configurations with strict EPL and low UB should emerge in presence of compressed wage structures. Micro data on wage premia on educational attainments and on the strictness of EPL are in line with our results. We also find empirical support to the substantive assumptions of the model on the effects of EPL.

Keywords: Employment protection, unemployment insurance, political equilibria

JEL Classification: D72, J65, J68

Suggested Citation

Boeri, Tito and Conde-Ruiz, J. Ignacio and Galasso, Vincenzo, Cross-Skill Redistribution and the Trade-Off between Unemployment Benefits and Employment Protection (October 2004). CEPR Discussion Paper No. 4711. Available at SSRN: https://ssrn.com/abstract=641587

Tito Boeri (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

J. Ignacio Conde-Ruiz

Foundation for Applied Economic Research (FEDEA) ( email )

Jorge Juan 46
Madrid, 28001
Spain
+34 91 435 9020 (Phone)
+34 91 577 9575 (Fax)

Vincenzo Galasso

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, 6900
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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