Business and Labor Market Policies

Abstract

Regulating the labor market to increase job security is just one possible way of addressing workers demands for income protection against labor market risks. By acknowledging that other policies can be used to address the same political demand, this paper develops a simple framework to understand rms preferences towards labor market regulation vis a vis a system of unemployment bene ts, which can be understood as a political substitute. Two key empirical implications of the theoretical argument are tested and corroborated with data on ring costs and the generosity of the unemployment insurance system from OECD countries and the rest of the world. First, there seems to be a relation of substitution between the cost of ring and the generosity of unemployment subsidies across countries. And second, countries with more volatile economic conditions seem to prefer the latter policy to the former.