revised version published as 'The Political Economy Of Flexicurity' in: Journal of the European Economic Association, 2012, 10 (4), 684–715
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 favour 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.
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