Designing labor market institutions
There is fairly wide agreement among economists on what constitutes optimal—or at least good—product market and financial market institutions. There is much less agreement on what constitutes optimal—or at least good—labor market institutions. As a result, the public debate is too often dominated by clichés and slogans. “Get rid of labor market rigidities” is one of the most frequent. Meanwhile, policymakers focus on politically feasible, incremental reforms, with little sense of the ultimate goal. Economists could play a more useful role here. This is why Jean Tirole and I decided to explore the optimal design of labor market institutions. This paper represents a progress report. It gives a sense of the general architecture we see coming out of our analysis.