Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 1998:2: Active Labour Market Programmes and Unemployment in a Dual Labour Market

Yoshihiko Fukushima ()
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Yoshihiko Fukushima: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: The paper presents a theoretical analysis of the macroeconomic effects of active labour market programmes in a dual labour-market framework. The paper uses the Shapiro-Stiglitz efficiency-wage model. Active labour market programmes train unskilled labour and transfer them from a high-unemployment to a low-unemployment sector. Programmes have a direct labour-transfer effect which tends to reduce total unemployment. They also have effects on wages via expectations. The later effects were to a very large extent neglected in earlier discussions of active labour-market policy. The model formally identifies and defines the effects on wages via expectations. The net sign of the latter effects depend on how programmes are targeted. In general, the net effect on unemployment is ambiguous. The model explains the conditions under which active labour market programmes reduce aggregate unemployment.

Keywords: Active labour market programme; unemployment; dual labor market; efficiency wage

JEL-codes: J31; J41; J64

35 pages, September 1998

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