The Insider-outsider Theory of Employment and Unemployment

This book provides an accessible, balanced account of the insider-outsider theory of labor market activity. It focuses on how "insiders" (experienced incumbent employees whose jobs are protected by various labor turnover costs) get market power, what they do with that power, and how their activities affect the "outsiders" (who are either unemployed or work in the informal sector). The book examines the effect of insiders' activities on wages, employment, and unemployment, discusses the associated policy implications, and relates the insider-outsider theory to other theories of labor market activity. The central part of the book consists of a series of previously published articles that have been edited to convey a single coherent account of a theory of unemployment that is growing in popularity. Chapters are preceded by overviews summarizing the main ideas and relating them to the book's underlying theme. The concluding chapter points out the predictions and policy implications of the theory. Lindbeck and Snower have taken care to make the main ideas accessible to a wide audience, without sacrificing analytical rigor."The insider-Outside Theory of Employment and Unemployment is concerned with both the causes and consequences of insider power. It emphasizes unemployment in chapters that survey modern unemployment theories and provide a formal comparison of the insider-outsider and efficiency-wage explanations of involuntary unemployment. Other topics include labor turnover costs (how they arise from insiders' activities and from job security legislation, and how they give rise to insider power), Union activities (how unions can amplify labor turnover costs, and provide insiders with newtools of rent-creation, such as strikes and work-to-rule actions), and the effect that insider activities can have in perpetuating the effects of temporary macroeconomic shocks. Assar Lindbeck is Professor of International Economics and Director of the Institute of International Economics at the University of Stockholm. Dennis J. Snower is Professor of Economics, Birbeck College, University of London.