Working Paper: CEPR ID: DP1963
Authors: Mike Orszag; Dennis J. Snower
Abstract: The analysis provides a new explanation for two widespread problems concerning European unemployment policy: the disappointingly small effect of many past reform measures on unemployment; and the political difficulties in implementing more extensive reform programmes. We argue that the heart of the difficulty may be the failure of many European governments to implement broad-based reform strategies. Our analysis suggests that major unemployment policies are characterized by economic complementarities (in the sense that the effectiveness of one policy depends on the implementation of other policies) and political complementarities (in that the ability to gain political consent for one policy depends on the acceptance of other policies). Under these circumstances, incremental, small-scale adjustments of existing policy packages are doomed to failure. Our analysis suggests, instead, that the European unemployment problem should be tackled through 'broad' reforms that manage to exploit the salient economic and political complementarities among individual policy measures.
Keywords: unemployment; complementarities; political economy; employment policy; unemployment benefits; taxation; inequality
JEL Codes: E61; E62; H21; H23; H53; H55; H61; J64; J68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic complementarities (D10) | effectiveness of unemployment policies (J68) |
| job search-promoting measures (J68) | effectiveness of demand-side policies (E65) |
| political complementarities (D10) | feasibility of policy reforms (D78) |
| success of unemployment benefit reforms (J65) | contingent upon tax reforms (H29) |
| broad reforms (E69) | effective addressing of unemployment (J68) |
| incremental adjustments to policies (D78) | unlikely success (D81) |
| failure to consider complementarities (D10) | modest reforms (E69) |
| modest reforms (E69) | perpetuation of high unemployment rates (J68) |