Welfare and the Labour Market in the EU

Over the last two decades, EU institutions have been increasingly concerned with the issues of unemployment reduction and job creation. The EU has recommended that member states develop welfare systems that moderate the negative effects of market relationships on the one hand, and enhance the efficiency of market performance on the other. This paper provides an overview of labour market policies to protect individuals from unemployment. It shows that in the context of EMU and EU enlargement, policies such as unemployment insurance could improve welfare, to the extent that it encourages labour mobility, but has negative effects on individuals’ job search efforts. To counter welfare and inactivity traps, member state governments are asked to reform benefit and tax systems towards more employment-friendly policies. Further, the effect of population ageing on the labour force is considered, along with options to sustain labour force supply and state pension provision. The paper concludes that measures to expand the range and quality of employment opportunities available to older workers will become increasingly important and that governments will have an important educational and coordinating role to play in facilitating these adjustments.