Reforming Labor Market Institutions: Unemployment Insurance and Employment Protection
Prepared for the Barcelona Conference on the Post-Washington Consenus
August 24, 2004ABSTRACT:
Few economists would argue against (at least some) state intervention in the labor market. One can think of a number of relevant dimensions here, where market outcomes may be either ineffcient, or socially unacceptable, or both. Collective bargaining may lead to both ineffcient and socially unacceptable outcomes, implying the need for the state to define rules regulating bargaining. Low-skill workers may have a productivity lower than what society considers a "living wage", implying the need to provide additional income to those workers. Markets may do a poor job of insuring workers against unemployment, implying the need for the state to provide unemployment insurance and to define rules regulating separations.
In this paper, I shall concentrate only on this last dimension. My excuse is that it is a central dimension, and I have not thought enough about the others. Section 1 sets the stage, and reviews the rationale for state intervention in the labor market. Section 2 covers an explanation of how, in Europe, desirable goals have led to flawed institutions and bad labor market outcomes. Section 3 turns to the optimal design of unemployment insurance and employment protection. Section 4 then explores paths for reforms in rich countries, i.e. Europe. Section 5 does the same for poorer countries, such as Latin America.
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