Insider-outsider theory of employment

[4] The economic agents at play are the employed, the unemployed, firms, often unions (referred to by collective bargaining), and sometimes the government.

The insider-outsider model explains why nations with high collective bargaining experience the most severe persistence in the natural rate of unemployment.

For example, Spain has a high percentage of workers covered by collective bargaining compared to its global counterparts, indicating that the insiders of their labor market harness most of the power when it comes to wage bargaining and wage-setting (see Figure below) and hence experiences high and persistent unemployment.

But this is not the case for countries like Spain, so the insiders set the wage without the goal of decreasing unemployment, keeping the outsiders from getting in.

The outsiders bear the majority of the burden in terms of consequences from insiders setting the wage and disregarding the need for more job creation.

The unemployed risk never developing the human capital required for employment, disaffection with the labor market, and experiencing the atrophy of any skills that would have been attractive to firms.

Unemployed workers who are constantly being crowded out by insiders rely on social welfare programs, family income, or the black market.

In turn, the outsiders exist in a space with few resources, like meager social assistance, poor schooling, underdeveloped policy protection, and most importantly, little opportunity to move up in society.