The Political Economy of Labor Policy (Submitted)

Abstract: This article explores the political origins of size-contingent Employment Protection Legislation (EPL), which typically imposes stricter requirements on larger firms. The theory is based on the political conflict between workers and entrepreneurs that is shaped by endogenous occupational decisions. The equilibrium policy protects workers in larger but not in smaller firms. This is true regardless of the weights the government puts on the welfare of workers and entrepreneurs. Firms strategically adjust their labor demand in response to the size-contingent EPL policy, resulting in welfare distortions. These welfare distortions can be eliminated by balancing the bargaining power of workers and entrepreneurs.

Diego Huerta
Diego Huerta
PhD Student in Economics

I’m a fifth-year economics Ph.D. candidate at Northwestern University. I’m a macroeconomist with an interest in political economy. I work with heterogeneous agent models to understand the joint determination of inequality, policies, and macroeconomic outcomes. My JMP proposes a theory that explains the striking differences in the evolution of the welfare state across countries. In addition to my JMP, my research explores the economic origins of financial and labor regulations across countries.