Labor Market Institutions and Efficiency

Labor market institutions play an essential role in determining the distribution of bargaining power between employers and employees. In turn, the allocation of bargaining power affects, among other things, the success of labor negotiations and thereby the level of unemployment, the power of incentive schemes in labor contracts and the associated efficiency of the latter. Different institutions may shape these outcomes differently. For example, social security laws directly influence the threat point of workers. In contrast, employment laws (regulating dismissal procedures and employment conditions) and collective relation laws (co-determination and conflict resolution mechanisms) may directly affect the worker’s ability to extract a fraction of the quasi-rent. This paper attempts to compare the efficiency effect of different institutional arrangements.