Working Paper: CEPR ID: DP1205
Authors: Gilles Saint-Paul
Abstract: We develop a general equilibrium analysis of the impact of active labour market policy on unemployment, wages and the welfare of the employed. This framework is used to assess the political support in favour of such policies and to relate it to the working of such policies and other parameters characterizing the economic environment. The main finding is that if the employed have little exposure to unemployment and if the demand for unskilled labour is inelastic, there may be political support for policies which actually raise the equilibrium level of total unemployment.
Keywords: unemployment; wage formation; labour market policy; political economy
JEL Codes: D72; D78; E24; J68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Employed have little exposure to unemployment and inelastic demand for unskilled labor (J29) | Political support for ALMPs (E69) |
| Taxation effect (H29) | Tax burden on the employed (H22) |
| Exposure effect (C92) | Employed support ALMPs (J68) |
| Insider effect (G14) | Employed favor policies that may raise overall unemployment (J68) |
| Political support for ALMPs (E69) | Ineffective policies that do not reduce unemployment (J68) |