Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5067934 | European Journal of Political Economy | 2015 | 21 Pages |
â¢Political instability influences the level of labour market institutions.â¢We provide both a theoretical and an empirical analysis using OECD aggregate data.â¢Political instability favours labour regulations that constrain labour taxes.â¢Political instability also induces a lower unemployment benefit replacement rate.
This paper investigates the relationship between political instability and labour market institutions. We develop a theoretical model in which political instability creates incentives for a government to introduce labour market regulation in the economy. The distortionary effect of regulation on unemployment effectively puts a constraint on the design of fiscal and public policies. We empirically investigate these predictions using panel data for 21 OECD countries for the period 1985-2006. Our results are consistent with the view that political instability is associated with more regulated labour markets, lower labour taxation, and lower unemployment benefit replacement rates.