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Research Institute of Industrial Economics (IFN) Working Paper Series

No 500:
Anatomy of Policy Complementarities

J. Michael Orszag and 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 programs. 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; (follow links to similar papers)

JEL-Codes: E61; E62; H21; H23; H53; H55; H61; I30; J64; J68; (follow links to similar papers)

54 pages, June 23, 1998

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