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Can Active Labour Market Policy Work? Some Theoretical Considerations

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  • J Richardson

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.

Suggested Citation

  • J Richardson, 1997. "Can Active Labour Market Policy Work? Some Theoretical Considerations," CEP Discussion Papers dp0331, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0331
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    References listed on IDEAS

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    1. Calmfors, Lars & Forslund, Anders, 1991. "Real-Wage Determination and Labour Market Policies: The Swedish Experience," Economic Journal, Royal Economic Society, vol. 101(408), pages 1130-1148, September.
    2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    3. 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 353-371, August.
    4. 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 601-619, May.
    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. Manning, Alan, 1993. "Wage Bargaining and the Phillips Curve: The Identification and Specification of Aggregate Wage Equations," Economic Journal, Royal Economic Society, vol. 103(416), pages 98-118, January.
    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 103-128, February.
    8. Holmlund, Bertil & Linden, Johan, 1993. "Job matching, temporary public employment, and equilibrium unemployment," Journal of Public Economics, Elsevier, vol. 51(3), pages 329-343, July.
    9. Warr, Peter & Jackson, Paul, 1987. "Adapting to the unemployed role: A longitudinal investigation," Social Science & Medicine, Elsevier, vol. 25(11), pages 1219-1224, January.
    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. Bishop, John & Haveman, Robert, 1979. "Selective Employment Subsidies: Can Okun's Law be Repealed?," American Economic Review, American Economic Association, vol. 69(2), pages 124-130, May.
    12. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
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    Cited by:

    1. 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 - Economics Institute, Prague.
    2. 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.
    3. Pieter Serneels, 2002. "The added worked effect and intra household aspects of unemployment," CSAE Working Paper Series 2002-14, Centre for the Study of African Economies, University of Oxford.
    4. J Richardson, 1997. "Wage Subsidies for the Long Term Unemployed: A Search Theoretic Analysis," CEP Discussion Papers dp0347, Centre for Economic Performance, LSE.
    5. repec:eee:labchp:v:3:y:1999:i:pc:p:3085-3139 is not listed on IDEAS
    6. Brian Bell & Richard Blundell & John Reenen, 1999. "Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 339-360, August.
    7. Berthold Norbert, 2000. "Mehr Beschäftigung, weniger Arbeitslosigkeit: Setzt sich das ökonomische Gesetz gegen (verbands-)politische Macht durch?," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 51(1), pages 231-260, January.

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