Workers as Insurance: Anticipated Government Assistance and Factor Demand

Abstract

Governments are often subject to political pressure to protect “jobs” which are threatened by import penetration of domestic markets. The pressure for intervention is increased when the industry is geographically concentrated; then the pro-protection coalition comprises not only firms and workers in the industry directly impacted, but also the interests standing to lose from regional decline. Typical of the political response to such pressure is the pronouncement of a senior cabinet minister in Israel that “the government would not stand idly by and preside over pockets of unemployment in development towns”. These towns are often specialized in production, and hence local employment is sensitive to price movements in one good. In the above instance, the reference was to the impending closure of the Ata textile plant in the northern Israeli town of Kiryat Ata. The plant had benefitted from government assistance in the past. Threat of closure led to considerable pressure for further assistance, or a direct government buyout. There were also proposals that the government pay for private interests to take over the running of the plant. After considerable public debate and prolonged demonstrations by workers whose jobs were threatened, the government decided against intervention, and the plant closed down. However, at various times during the Ata “crisis”, it appeared that the government might succumb to the political pressure to intervene to forestall unemployment in the development town.