Capital market integration and optimal employment protection policies

Kawata Keisuke

IDEC DP2 Series

This study analyzes the effect of capital markets integration on labor market policies. To that end, it incorporates imperfect labor markets into a tax competition model. There exist two types of households, types 1 and 2, that are risk-averse. Each type of household is endowed with one unit of a worker. Additionally, households are endowed with capital. Type 2 households own lager amounts of capital than type 1 households. The government can choose the following policies: unemployment benefits and layoff, payroll, and capital subsidies or taxes. When capital markets are integrated, households can invest their capital in foreign capital markets. This study shows that the integration of capital markets leads to ine￠ cient policies under which labor productivity is high, but income inequality within a country and the risk of job loss are also high. As a result, the social welfare of each country in integrated capital markets is lower than in non-integrated capital markets.

Capital market integration

Unemployment risk

Labor market policies

Tax competition

JEL Classification Numbers: F21

JEL Classification Numbers: F66

JEL Classification Numbers: H26

JEL Classification Numbers: J63

JEL Classification Numbers: J65

Social science [ 300 ]

eng

広島大学大学院国際協力研究科