The Positive Economics of Labor Market Rigidities and Investor Protection

This paper presents a positive model which shows that institutional setups on capital and labor markets might be intertwined by politicoeconomic forces. Some countries especially in continental Europe exhibit a corporatist politicoeconomic equilibrium with a substantial protection of insiders on both markets. The more important money is in political decision-making, the more divided the workforce is, and the more globalized capital markets are, the more likely is a capitalist politicoeconomic equilibrium with little employment and substantial investor protection. Our prediction of a negative cross-country relationship between labor market rigidities and of competition on capital markets receives considerable empirical support.