On the Determinants of Labour Market Institutions: Rent Seeking vs. Social Insurance

Abstract

What determines the structure of labour market institutions? I argue that common explanations based on rent seeking are incomplete. Unions, job protection and egalitarian pay structures may have as much to do with social insurance of otherwise uninsurable risks as with rent seeking. In support of this more benign complementary hypothesis the paper presents a range of historical, theoretical and cross-country evidence. The social insurance perspective changes substantially the positive analysis of the future of European labour market institutions. It is not clear that globalization and the `new economy' will force countries to make their labour markets more flexible. These phenomena will probably increase the efficiency costs of existing institutions, but they may also make voters more willing to pay a high premium to preserve institutions that provide insurance.