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European
Economic Perspectives 23
Unemployment
Policy - Think Big
A recent CEPR
Discussion Paper (‘Anatomy of Policy Complementarities’ –
No. 1963) by Mike Orszag and Dennis Snower, provides a new explanation
for two problems at the heart of European unemployment policy: the
disappointingly small effect of many past reform measures on
unemployment, and the political difficulties of implementing more
extensive reform programmes. These researchers argue that reform has
frequently been unsuccessful because governments have failed to exploit
economic and political complementarities among policy measures.
Economic
complementarities arise when the effectiveness of one policy depends on
the implementation of other policies. For example, since it is
impossible for people to find more work when firms provide no new jobs,
and since it is impossible for firms to fill their vacancies when there
is no one looking for them, supply-side labour market policies – such
as job counselling to promote job search – are complementary with
demand-side policies – such as measures to stimulate investment
demand.
Similarly, tax breaks
for hiring the long-term unemployed – as in France or Germany – may
be ineffective in the presence of generous unemployment benefits, since
the latter discourage the unemployed from taking advantage of the
former. Giving employers greater latitude in negotiating fixed-term
contracts – as in Spain – may do little to stimulate employment
unless the job security provisions associated with the incumbent
employees are relaxed. And reducing the magnitude and duration of
unemployment benefits may have only a limited effect on the employment
rate when there are large incapacity benefits – as in the Netherlands
– or high minimum wages – as in France.
In the presence of
economic complementarities, individual unemployment policy measures
might appear ineffective, but they would not be if they were implemented
as part of a broad-based reform package. What is more, the exploitation
of complementarities would address the apparent trade-off between
unemployment and inequality by giving the unemployed greater incentives
to work.
Unemployment policies
are also characterized by political complementarities, when the ability
to gain political consent for one policy depends on the implementation
of other policies. For example, the political feasibility of
unemployment benefit reform – such as reducing the magnitude and
duration of benefits – depends on tax reform – such as reducing
payroll and income taxes – and employment promotion policies – such
as hiring subsidies.
The reason is that
‘single-handed reforms’ – such as reducing unemployment benefits
without changing any other policy instrument – may improve economic
efficiency, but they often pit the interests of the employed against
those of the unemployed, creating political deadlock. In contrast,
‘broad (many-handed) reforms’ enable the government to use the
efficiency gains from one reform to compensate the losers from another
reform – and vice versa – thereby breaking the political deadlock.
Complementary policies
call for a distinctive approach to policy-making. When only a small
number of unemployment policies is
under consideration, it may be politically impossible to implement them
and their impact on unemployment would be small. It is only when a
broader range of policies are implemented simultaneously that they
become politically feasible and economically effective.
The Orszag-Snower
analysis suggests that the timid approach to policy-making in most
European countries over the past two decades may simply not be an option
in future. Incremental, small-scale adjustments of existing policy
packages may be doomed to failure. They conclude that perhaps the only
way to tackle Europe’s unemployment problem is to have the courage to
think big.
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