The Political Economy of Labour Market Institutions

Labour market rigidities are key culprits for such high unemployment as Europe has experienced since the 1970s. But governments that have tried to remove rigidities have often faced harsh political opposition. This text examines why labour market institutions exist and why they are so persistent.
According to most orthodox economists, labour market rigidities are the key culprit for such high unemployment as has been observed in Europe since the 1970s. But governments that have attempted to follow the standard prescription of removing rigidities have often faced harsh political opposition. This book looks at why labour market institutions such as employment protection, unemployment benefits, and relative wage rigidities exist, what role they play in society, why they seem so persistent, where the pressure to reform them comes from, and whether reform can be politically viable or not. The book ascribes a central role to the existence of underlying microeconomic frictions and to redistributive pressures between rich and poor, and shows how these ingredients may give rise to labour market rents, which in turn explain why a coherent set of rigidities arise as the outcome of the political process. It is also shown that, at the same time, such rents create resistance to reform, and contribute to locking society into a high-unemployment, rigid equilibrium.