Insiders versus Outsiders

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Abstract
This article surveys the insider-outsider theory, which analyzes the behavior of economic agents in markets were some participants have more privileged positions than others. Incumbent workers (insiders) in the labor market enjoy more favorable employment opportunities than others (outsiders), on account of labor turnover costs (e.g. costs associated with hiring, training, firing, and insiders' ability to punish underbidding outsiders). The theory provides an explanation of existence and persistence of unemployment, and helps account for the different employment experiences in Europe and the United States. The article also discusses policy implications and examines how the theory is related to unions and social norms.
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