Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2011:9: What active labor market policy works in a recession?

Anders Forslund (), Peter Fredriksson () and Johan Vikström ()
Additional contact information
Anders Forslund: Institute for Labour Market Policy Evaluation, Postal: P.O. Box 513, SE-751 20 Uppsala, Sweden
Peter Fredriksson: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Johan Vikström: Institute for Labour Market Policy Evaluation, Postal: P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper discusses the case for expanding active labor market policy in recession. We find that there is reasonable case for relying more heavily on certain kinds of programs. The argument is tied to the varying size of the lock-in effect in boom and recession. If programs with relatively large lock-in effects should ever be used, they should be used in a downturn. The reason is simply that the cost of forgoing search time is lower in recession. We also provide new evidence on the relative effectiveness of different kinds of programs over the business cycle. In particular we compare an on-the-job training scheme with (traditional) labor market training. We find that labor market training is relatively more effective in recession. This result is consistent with our priors since labor market training features relative large lock-in effects.

Keywords: Active labor market policy; business cycle; unemployment

JEL-codes: J08; J64; J68

35 pages, February 15, 2011

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