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Can Active Labour Market Policy Work? Some Theoretical Considerations

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  • J Richardson
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    Abstract

    Persistent high unemployment in Europe has led to renewed interest in Active Labour Market Policy. However, most existing theory suggests that its effects are ambiguous at best. We argue that job search assistance and wage subsidies are more appropriately modelled as a transition rather than the state-based approach of existing theory. This eliminates the ambiguity. We present two main models, one in which negative duration dependence in unemployment arises from state dependence, the other where it is due to heterogeneity. In both cases policy is unambiguously effective provided it is targeted on those who are, or are most likely to become, long-term unemployed. Some crude estimates suggest that Active Labour Market Policies could have a significant, though not spectacular, effect in reducing unemployment.

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    File URL: http://cep.lse.ac.uk/pubs/download/DP0331.pdf
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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0331.

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    Date of creation: Feb 1997
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    Handle: RePEc:cep:cepdps:dp0331

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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    1. Warr, Peter & Jackson, Paul, 1987. "Adapting to the unemployed role: A longitudinal investigation," Social Science & Medicine, Elsevier, vol. 25(11), pages 1219-1224, January.
    2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, September.
    3. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
    4. Holmlund, B. & Linden, J., 1991. "Job Matching, Temporary Public Employment, and Equilibrium Unemployment," Papers 1991l, Uppsala - Working Paper Series.
    5. Layard, P R G & Nickell, S J, 1980. "The Case for Subsidising Extra Jobs," Economic Journal, Royal Economic Society, vol. 90(357), pages 51-73, March.
    6. Alan Manning, 1992. "Wage Bargaining and the Phillips Curve: The Identification and Specification of Aggregate Wage Equations," CEP Discussion Papers dp0062, Centre for Economic Performance, LSE.
    7. Nickell, Stephen J, 1987. "Why Is Wage Inflation in Britain So High?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 103-28, February.
    8. Bishop, John & Haveman, Robert, 1979. "Selective Employment Subsidies: Can Okun's Law be Repealed?," American Economic Review, American Economic Association, vol. 69(2), pages 124-30, May.
    9. Calmfors, Lars & Lang, Harald, 1995. "Macroeconomic Effects of Active Labour Market Programmes in a Union Wage-Setting Model," Economic Journal, Royal Economic Society, vol. 105(430), pages 601-19, May.
    10. Outi Aarnio, 1993. "Temporary active labour market programmes - potential effects on unemployment," Finnish Economic Papers, Finnish Economic Association, vol. 6(1), pages 13-24, Spring.
    11. Korpi, Tomas, 1995. "Effects of Manpower Policies on Duration Dependence in Re-employment Rates: The Example of Sweden," Economica, London School of Economics and Political Science, vol. 62(247), pages 353-71, August.
    12. Calmfors, Lars & Forslund, Anders, 1991. "Real-Wage Determination and Labour Market Policies: The Swedish Experience," Economic Journal, Royal Economic Society, vol. 101(408), pages 1130-48, September.
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    Cited by:
    1. Pieter Serneels, 2002. "Explaining Non-Negative Duration Dependence Among the Unemployed," CSAE Working Paper Series 2002-13, Centre for the Study of African Economies, University of Oxford.
    2. Pieter Serneels, 2002. "The Added Worker Effect and Intrahousehold Aspects of Unemployment," Economics Series Working Papers WPS/2002-14, University of Oxford, Department of Economics.
    3. Galina Vereshchagina, 2005. "Between-Firm Redistribution of Profit in Competitive Industries: Why Labor Market Policies May Not Work," CERGE-EI Working Papers wp268, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    4. Brian Bell & Richard Blundell & John Van Reenen, 1999. "Getting the unemployed back to work: the role of targeted wage subsidies," IFS Working Papers W99/12, Institute for Fiscal Studies.
    5. J Richardson, 1997. "Wage Subsidies for the Long Term Unemployed: A Search Theoretic Analysis," CEP Discussion Papers dp0347, Centre for Economic Performance, LSE.

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