Front Matter
Author:
Mr. Dennis J. Snower https://isni.org/isni/0000000404811396 International Monetary Fund

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Mr. David T. Coe
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Front Matter Page

Research Department

Table of Contents

  • Summary

    • I. Introduction

    • II. Complementarities in European Labor Markets

    • III. A Simple Model

      • 1. The Search for Workers and Jobs

      • 2. The Supply of Vacancies

      • 3. Wage Determination

      • 4. The Unemployment Rate

      • 5. The Government Budget Constraint

      • 6. The Labor Market Equuibrium and the Tax-Benefit Multiplier

    • IV. Policy Complementarities

    • V. Extensions

      • 1. Complementarities with the Costs of Human Capital Acquisition

      • 2. Complementarities with a Legislated Minimum Wage

  • VI. Redistributive Policy

  • VII. Conclusions

  • References

  • Table 1. Policy Complementarities

  • Figures

    • 1. Marginal Tax Wedges

    • 2. Maximum Notification and Severance Pay Periods

    • 3. Unemployment Benefit Replacement Rates

    • 4. Labor Market Equuibrium and the Tax-Benefit Multiplier

    • 5. Policy Complementarities

    • 6. Equilibrium Unemployment under the Unemployment Benefit System and the Conditional Negative Income Tax System

Summary

The message of this paper can be summarized in two simple points: a wide range of labor market institutions have complementary effects on unemployment: thus a correspondingly wide range of labor market reforms are also complementary. These complementarities mean that policies to reduce unemployment will be more effective if they are implemented together rather than in isolation.

This paper presents a search model that incorporates a variety of institutional features of European labor markets. In this model there is a striking interrelation between the government budget constraint and institutional features of the labor market: policies that are successful in lowering unemployment allow tax declines that encourage further reductions in unemployment. The model also describes a network of complementarities, which implies that changes in policies will have a greater effect on unemployment when implemented in conjunction than in isolation. A related result is that policy rigidities in one aspect of the labor market will reduce the effectiveness of labor market policy reforms in other areas. To be politically feasable, labor market reforms should be accompanied by policies to address the distributional consequences of reform and to achieve distributional objectives more efficiently. In this context, the paper shows how a change from an unemployment benefit system to a conditional negative income tax system can reduce unemployment.

Failure to take into account complementarities among unemployment policies may be one reason why the proliferation of recent labor market policy initiatives and reforms aimed at lowering unemployment in Europe have had such little effect. In the absence of complementarities, incremental and piecemeal reforms could, in principle, be effective. With complementarities, however, incremental and partial reforms are ineffective in comparison with “fundamentar” labor market reforms, defined as reforms that are both deep and across a broad range of complementary policies and institutions.

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Policy Complementarities: The Case for Fundamental Labor Market Reform
Author:
Mr. Dennis J. Snower
and
Mr. David T. Coe