MACROECONOMIC EFFECTS OF ACTIVE LABOR-MARKET PROGRAMS IN A UNION WAGE-SETTING MODEL

The recent Western European policy debate on unemployment has emphasis ed the benefits of active labour market programmes. We analyse the eff ects on wage pressure and equilibrium employment in a union wage-setti ng framework. Programmes are wage-reducing to the extent that they hel p maintain effective labour-force participation. But they may also wea ken insider incentives for wage restraint as the disutility of lay-off s becomes smaller. Targeting the long-term unemployed is crucial for t he success of active labour market policy, since the welfare effects o n the laid-off then are more heavily discounted and employment opportu nities are redistributed from insiders to outsiders.