Job protection, housing market regulation, and the youth

• Date: 01 December 2019
• Author: Tanguy Ypersele,Bruno Decreuse,Antoine Bonleu
• DOI: http://doi.org/10.1111/jpet.12323
• Published date: 01 December 2019

Received: 6 October 2017

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Accepted: 20 May 2018

DOI: 10.1111/jpet.12323

ORIGINAL ARTICLE

Job protection, housing market regulation,

and the youth

Antoine Bonleu

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Bruno Decreuse

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Tanguy van Ypersele

Aix‐Marseille Université, CNRS, EHESS,

Centrale Marseille, AMSE, Marseille, France

Correspondence

Tanguy van Ypersele, AMSE, Chateau Lafarge,

13290 Les Milles, France.

Email: tanguy.vy@univ-amu.fr

Young Europeans experience high unemployment rates,

job instability, and late emancipation. Meanwhile, they do

not support reforms weakening protection on long‐term

contracts. In this paper, we suggest a possible rationale for

such reform distaste. When the rental market is strongly

regulated, landlords screen applicants with regard to their

ability to pay the rent. Protecting regular jobs offers a

second‐best technology to sort workers, thereby increas-

ing the rental market size. We provide a model where

nonemployed workers demand protected jobs despite

unemployment and the share of short‐term jobs increases,

whereas the individual risk of dismissal is unaffected. Our

theory can be extended to alternative risks and markets

involving correlated risks and commitment under imper-

fect information.

KEYWORDS

labor market dualism, rent default, screening

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INTRODUCTION

Young Europeans struggle to find jobs, are over represented in temporary employment, and leave the parental

home remarkably late. It is consensual to blame labor and housing market institutions as being responsible for

these outcomes. Housing market regulation (HMR) has been accused of reducing the rental market size, thereby

hampering worker mobility. Employment protection legislation (EPL) is viewed as detrimental to labor market

entrants by depleting the supply of vacancies and closing access to long‐term jobs. However, the youth support for

labor market reforms is tenuous. Figure 1 shows that the preference for protected jobs does not vary much with

age within countries. In France, youth have massively demonstrated against reforms of job protection in 2006

and 2016.

J Public Econ Theory. 2019;21:1017–1036. wileyonlinelibrary.com/journal/jpet © 2018 Wiley Periodicals, Inc.

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Distrust vis‐à‐vis pro‐marketreforms may be rooted in the cultural or legal traits of continental European countries.

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In this paper, we argue that youth distaste for reforms of job protection is rational in a context where the rental market is

strongly regulated. The key idea is as follows: HMR generates a social demand for job protection as a second‐best

technology to signal workers’ability to pay the rent. When the rental market is strongly regulated, landlords need to

screen applicants on the basis of the expected risk of rent default. In this goal,landlords use labor market signals to figure

out the individual risk of dismissal. When permanentjobsarenotprotected, selection in long‐term employment is low

and the mean risk of dismissal is large. Thus, landlords are reluctantto rent their dwellings. Protecting jobs forces firms to

be more selective so that the quality of the signal conveyed by labor market contracts increases.

Our analysis is motivated by a series of aggregate correlations displayed by the panel of Figur e 2a–d. We use two

indices measuring the extent of EPL and HMR: the OECD strictness index of EPL on regular employment and the index of

procedural formalism built by Djankov, LaPorta, Lopez‐de‐Silanes, and Shleifer (2003) and extended by Balas, LaPorta,

Lopez‐de‐Silanes, and Shleifer (2009). They focus on the eviction of a tenant who does not pay the rent. The index is built

from several subindices that describe the exact procedure used by litigants and courts. Youth employment and

emancipation are measured from the European Community Household Panel (ECHP), which covers the period 1994–

2001. The youth employment rate is the ratio of employees to total population of 16–35‐year‐olds, whereas the

emancipation rate is the proportion of 16–35‐year‐olds who do not live with parents.

Figure 2a,b shows that young persons living in countries where the rental market is very regulated struggle to

find jobs and quit the family home very late. Figure 2c shows the proportion of young employees in a temporary job

over total youth employment against the EPL index. Young workers are more likely to occupy short‐term jobs in

countries that strongly protect long‐term jobs. Lastly, Figure 2d highlights the positive correlation between the

youth demand for job protection and HMR in OECD countries.

We provide a model of the housing and labor markets for young workers predicting these aggregate

correlations at aggregate level. In this model, job protection reduces the odds of employment, increases the share

FIGURE 1 The demand for job security by age group in European countries, 1999–2001. Job security is

derived from the third wave of the European Values Survey (1999–2001). It is the percentage of individuals who

claim that it is important to have good job security. The variable is computed for two age groups, those between 16

and 35 and those who are older

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Botero, Djankov, LaPorta, and Lopez‐de‐Silanes (2004) put forward the role of the legal origins of the judicial system, French origins being more prone to

regulating markets. Algan and Cahuc (2006) highlight machismo and the dominant religion. Algan and Cahuc (2009) examine the role of civic attitudes.

Alesina, Algan, Cahuc, and Giuliano (2015) focus on family values.

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