Working Paper: CEPR ID: DP2109
Authors: Gilles Saint-Paul
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 favour 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 maximumjob 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 a negative impact of exogenous turnover on employment protection.
Keywords: Vintage Capital; Obsolescence; Political Economy; Firing Costs; Creative Destruction
JEL Codes: E6; E24; J3; J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political support for employment protection legislation (EPL) (J08) | rents enjoyed by incumbent workers (J39) |
| workers' bargaining power (J52) | political support for employment protection legislation (EPL) (J08) |
| rate of creative destruction (O39) | political support for employment protection legislation (EPL) (J48) |
| firing costs (J32) | political equilibrium regarding employment protection legislation (EPL) (J48) |
| higher growth rates (O49) | political support for employment protection legislation (EPL) (J08) |
| workers in older plants (L23) | higher firing costs (L97) |
| workers in younger plants (J82) | lower firing costs (L94) |
| lost generation of workers (J69) | political equilibrium regarding employment protection legislation (EPL) (J48) |