2018/01 | LEM Working Paper Series | ||||||||||||||||
What if supply-side policies are not enough? The perverse interaction of flexibility and austerity |
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Giovanni Dosi, Marcelo C. Pereira, Andrea Roventini and Maria Enrica Virgillito |
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Keywords | |||||||||||||||||
Industrial-relation Regimes, Flexibility, Active Labour Market Policies, Austerity, Agent-based models
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JEL Classifications | |||||||||||||||||
C63, E24, H53, J88
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Abstract | |||||||||||||||||
In this work we develop a set of labour market and fiscal policy
experiments upon the labour and credit augmented “Schumpeter meeting
Keynes” agent-based model. The labour market is declined under two
institutional variants, the “Fordist” and the “Competitive” set-ups
meant to capture the historical transition from the Fordist toward the
post “Thatcher-Reagan” period. Inside these two regimes, we study the
different effects of supply-side active labour market policies (ALMPs)
vs. demand-management passive labour market ones (PLMPs). In
particular, we analyse the effects of ALMPs aimed at promoting job
search, and at providing training to unemployed people. Next, we
compare the effects of these policies with unemployment benefits
simply meant to sustain income and therefore aggregate
demand. Considering the burden of unemployment benefits in terms of
public budget, we link such provision with the objectives of the
European Stability and Growth Pact. Our results show that (i) an
appropriate level of skills is not enough to sustain growth when
workers face adverse labour demand; (ii) supply-side policies are not
able to reverse the perverse interaction between flexibility and
austerity; (iii) PLMPs outperform ALMPs in reducing unemployment and
workers’ skills deterioration; and (iv) demand-management policies are
better suited to mitigate inequality and to improve and sustain
long-run growth.
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