Exploring the Political Economy of Labour Market Institutions

Labour markets How reforms took place Many economists argue that the European unemployment problem relates to large labour market rigidities. This paper argues that many of those inflexibilities (and the underlying institutional regulations) can be understood as the outcome of political influence by incumbent employees. This is because many policies that increase unemployment actually benefit these insiders. An empirical investigation of the determinants of labour market institutions demonstrates that the observations are consistent with this view. The findings imply: (1) Higher exposure of the employed to unemployment facilitates a reduction in the level of employment protection. (2) Unemployment benefits are lower, the more employment reacts to wages. (3) A higher level of unemployment and the existence of a right-wing government slow down the growth rate of the minimum wage. —Giles Saint-Paul