Assessing the Political Viability of Labor Market Reform : The Case of Employment Protection

We analyze the political support for employment protection legislation. Unlike my previous work on the same topic, this paper pays a lot of attention to the role of obsolescence in the growth process. In voting in favor of employment protection, incumbent employees trade off lower living standards (because employment protection maintains workers in less productive activities) against longer job duration. The support for employment protection will then depend on the value of the latter relative to the cost of the former. We highlight two key determinants of this trade-off: first, the workers' bargaining power, and second, the economy's growth rate--more precisely its rate of creative destruction