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Labour Market Policy and the Equity-Efficiency Trade-Off

Author

Listed:
  • Filges, Trine

    () (Danish National Centre for Social Research (SFI))

  • Kennes, John

    () (University of Copenhagen)

  • Larsen, Birthe

    () (Copenhagen Business School)

  • Tranæs, Torben

    () (VIVE - The Danish Centre for Applied Social Science)

Abstract

This paper studies labour market policy in a society where differently gifted individuals can invest in training to further increase their labour market productivity. Furthermore, the government seeks both efficiency and equity. Frictions in the matching process create unemployment and differently skilled workers face different unemployment risks. We show that in such an environment, training programmes targeted to the disadvantaged workers complement passive transfers (UI benefits), unlike a general training subsidy. Combining passive subsidies with a training subsidy conditioned on individual unemployment duration – the typical Active Labour Market Programme – implies a favorable trade-off between equity and efficiency which encourages relative high spending on training.

Suggested Citation

  • Filges, Trine & Kennes, John & Larsen, Birthe & Tranæs, Torben, 2007. "Labour Market Policy and the Equity-Efficiency Trade-Off," IZA Discussion Papers 2824, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2824
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    References listed on IDEAS

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    1. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-1362, December.
    2. Richard Blundell, 2004. "Labour Market Policy and Welfare Reform: Meeting Distribution and Efficiency Objectives," De Economist, Springer, vol. 152(2), pages 233-250, June.
    3. Peter Fredriksson & Bertil Holmlund, 2006. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 357-386, July.
    4. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
    5. John P Martin, 1998. "What Works Among Active Labour Market Policies: Evidence from OECD Countries' Experiences," RBA Annual Conference Volume,in: Guy Debelle & Jeff Borland (ed.), Unemployment and the Australian Labour Market Reserve Bank of Australia.
    6. Benoit Julien & John Kennes & Ian King, 2000. "Bidding for Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 619-649, October.
    7. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    active and passive policy; equity-efficiency trade-off; labour market;

    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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