published in: Scandinavian Journal of Economics, 2002, 104 (4), 641-656
Why do many democracies fail to reform their labor market institutions? We study the feasibility of reforms that include the compensation of the insiders for the removal of labor market regulations. In our model workers differ in their ability to perform well on a liberalized labor market. The workers’ ability is unobservable for the government. This informational asymmetry generates additional costs for a government that wants to implement a compensation package together with a labor market reform. Under asymmetric information, a reformer who wants to ’’buy’’ the approval of voters has to pay them an informational rent in addition to the pure costs of compensation that would arise under symmetric information. In this setting unemployment may be constrained Pareto-efficient. Consequently, no reform is accepted unanimously by voters. We show that this result can further be strengthened: under majority voting labor market reforms may fail politically because there exists no reform package that gets the approval of a majority of voters. Our model explains the emergence of political deadlocks where low rates of unemployment can be removed in the political process while high rates of unemployment tend to be politically stable.
We use cookies to provide you with an optimal website experience. This includes cookies that are necessary for the operation of the site as well as cookies that are only used for anonymous statistical purposes, for comfort settings or to display personalized content. You can decide for yourself which categories you want to allow. Please note that based on your settings, you may not be able to use all of the site's functions.
Cookie settings
These necessary cookies are required to activate the core functionality of the website. An opt-out from these technologies is not available.
In order to further improve our offer and our website, we collect anonymous data for statistics and analyses. With the help of these cookies we can, for example, determine the number of visitors and the effect of certain pages on our website and optimize our content.