Advancing pension and labourmarket reforms
Retirement systems and labour-market regimes are persistent institutions that affect most individuals in society, albeit in different ways. Reforming them thus entails large distributional effects, since it typically generates winners and losers. Theoretically, the electoral cost (or benefit of retirement and/or labour-market reforms should depend on the magnitude of the reform’s impact on the winners and losers, and on their relative political influence.
However, these reforms are typically associated with large costs concentrated on relatively few, easily identifiable and politically relevant groups (such as labourmarket insiders and cohorts or sectors enjoying unusually generous pension arrangements), and yield individually small benefits that are spread out across large numbers of individuals, who may be difficult to identify ex ante.
Pension and labourmarket reforms may thus lead to large electoral backlashes. Nevertheless, politicians may choose, or find themselves compelled, to commit their electoral or political “capital” to reform. This motivation for reform may reflect ideological positions,2 a desire to secure economic opportunities for the country, external constraints (such as the need to comply with international undertakings), or an economic crisis that reveals the cost of the status quo. The last motivation has proved particularly relevant when persistent policies and institutional arrangements have coexisted with very dynamic environments. In fact, while some institutions, such as the unemployment benefit system, often act as automatic stabilisers, frequent adjustments are needed to fine tune them in response to evolving economic conditions. However, the most fundamental challenge to these institutions may come from their perceived unsustainability over time in a changing economic environment.