DP1585 Policy Complementarities: The Case for Fundamental Labour Market Reform

Author(s): David T Coe, Dennis J. Snower
Publication Date: February 1997
Keyword(s): Job Search, Job Security Legislation, Labour Market Institutions, Labour market policies, Labour Mobility, Minimum Wages, Payroll Taxes, Policy Complementarities, Skill Acquisition, Unemployment, Unemployment Benefits, Wage Bargaining, Welfare State Entitlements
JEL(s): E61, H25, J22, J23, J31, J32, J38, J41, J63, J64, J65, J66
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1585

The paper analyses complementarities among a variety of labour market policies. It shows: (a) that a wide range of labour market institutions (e.g. unemployment benefits, job security legislation and payroll taxes) have complementary effects on unemployment; and thus (b) that policies aimed at reforming these institutions are also complementary. These policy complementarities imply that partial labour market reform (directed at one institution, while leaving the other institutions in place) is unlikely to achieve significant reductions in unemployment. Rather, labour market reform becomes particularly effective only once a broad range of institutional rigidities are dismantled simultaneously and the distributional objectives of the previous policies are pursued through more efficient means.