Working Paper: CEPR ID: DP7333
Authors: Vincent Anesi; Philippe De Donder
Abstract: The objective of this paper is to provide a political economy explanation of the empirically observed negative correlation between employment protection and insurance. We study an economy composed of four groups of agents (capitalists, unemployed people, low- and high-skilled workers), each one represented by a politician. Politicians first form political parties and then compete in a winner-takes-all election by simultaneously proposing policy bundles composed of an employment protection level and an unemployment benefit. We first show that, in the absence of parties (i.e., in a citizen-candidate model), low-skilled workers are decisive and support a maximum employment protection level together with some unemployment benefit. We then obtain that, under some conditions, allowing for party formation results in all policy equilibria being in the Pareto set of the coalition formed by high-skilled workers together with unemployed people. Policies in this Pareto set exhibit a negative correlation between employment protection and unemployment benefit.
Keywords: bidimensional voting; citizen-candidate; flexicurity; labor market rigidities; party competition
JEL Codes: D72; J65; J68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market status of low-skilled workers (F66) | policy preferences (D72) |
| party formation (D79) | policies that exhibit a negative correlation between employment protection and unemployment benefits (J68) |
| political power of different worker groups (J58) | resultant policy outcomes (D78) |
| high-skilled workers and unemployed agents coalition formation (J68) | policies in Pareto set (D72) |