The effect of labour-market institutions on the unemployment rate

The study deals with the effects of labour-market institutions and rigidities on the rate of unemployment, analysing four institutions: unemployment benefit, the trade unions, taxation, and dismissal constraints. The pay model presented is a version of those associated with Pissarides. An attempt is made with this to express numerically the individual and compound effects of the institutions on the unemployment rate, and to gauge how much they influence the process of accommodation that follows shocks. The results show that taxes and dismissal constraints do not increase the rate of unemployment significantly; the effect of them becomes significant only when coupled with high unemployment benefit. A greater contribution to high unemployment is made by the bargaining power of the unions and the scale of unemployment benefit, but these effects can be ameliorated only by factors that do not feature in the model. The constraints on dismissal included in the model slow the reaction to the productivity shock, but the extent of this is not significant.