Title: European Economic Integration and the Effectiveness of Employment Policies
Reference Number: 1069
Publication Date: March 2003
JEL Classifcation: F15, F42, L51

K.C. Fung
University of California, Santa Cruz

Chelsea C. Lin
National Dong Hwa University

Andrea M. Maechler
International Monetary Fund

This paper examines the qualitative impact and the degree of effectiveness of several labor market policies when domestic union's wage response and economic integration are explicitly taken into account. The employment policies considered include payroll tax cuts, unemployment benefits cuts, aggregate demand expansion and wage subsidies. It is shown that with endogenous wages and an open economy, these policies can in some cases become more potent. But in other instances, they become less effective. In fact, under some conditions derived in this paper, employment policies can even be counterproductive, leading to a drop in domestic employment.

Key words: European unemployment, economic integration, labor market structure

Last modified: 09/18/2003