Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 1998:17: On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance

Jonas Agell ()
Additional contact information
Jonas Agell: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: The common view that far-reaching labour market deregulation is the only remedy for high European unemployment is too simplistic. First, the evidence suggests that deeply rooted social customs are an important cause of wage rigidity, going beyond the legal constraints emphasized in the political debate. Second, in a second-best setting, a compressed wage structure may generate an efficiency gain. Finally, based on simple plots of the relation between labour market institutions and openness in OECD countries, I conclude that the globalization of economic activity may lead to increased demand for various labour market rigidities.

Keywords: Labour market Institutions; Norms; Market failures; Social insurance

JEL-codes: J30; J50; J60

36 pages, September 10, 1998

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