Optimal Use of Labour Market Policies

Conny Wunsch

University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen

Abstract: Labour market policies for the unemployed combine passive income support with active measures that aim at improving jobseekers' employment prospects. This paper extends the theoretical framework developed by Pavoni and Violante (2005a) for the optimal choice between different active and passive policies for the unemployed to a setting which allows for the use of a job search assistance programme that affects the exit rate to employment by raising search effectiveness but not productivity in the job. These programmes are one of the most widely used activation measures in OECD countries and should, therefore, be taken into account when considering the optimal design of labour market policies. The enriched model allows to answer a wide range of interesting policy questions. It is used to assess the optimality of the West German policy in the period 2000-2002 as well as the benefits from introducing tight monitoring. It is shown that sizeable budget savings could have been realised by switching to the optimal scheme, but that the net gains from monitoring are only small. In addition, some interesting results on the optimal use of job search assistance and training are derived. It is shown that existing policies already share some but not all features of the optimal scheme.

Keywords: Unemployment insurance; active labour market policies; recursive contracts; job search; human capital (search for similar items in EconPapers)
JEL-codes: D82 J24 J64 J68 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2007-07
New Economics Papers: this item is included in nep-hrm and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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