A flow model of the Dutch labour market is used to calculate the effects of
policy options which aim to enhance employment, especially at the lower en
d of the labour market. The model distinguishes between good and bad jobs,
allows for endogenous wage formation and job creation, and describes the fl
ows between these jobs so that job-to-job mobility and the vacancy chain is
made endogenous. In the matching process employed job seekers with bad job
s compete with short-term and long-term unemployed for the filling of vacan
cies for good jobs. In each period part of the good and bad jobs are destro
yed which results in inflow into unemployment. The model explicitly describ
es the now of unemployed through the various duration classes of unemployme
nt and it allows for negative duration dependence so that the escape probab
ility from unemployment for long-term unemployed is smaller than for short-
term unemployed. The model is used to simulate the effects of external shoc
ks, such as structural productivity shocks. An impulse response analysis us
ing the model is also conducted considering labour market policies which ai
ms especially to enhance employment at the lower end of the labour market.
In particular, the effects are analysed of measures subsidising the opening
of bad jobs (jobs at the lower end of the labour market) and a rise in the
productivity of a bad job as compared to a good job which can be achieved
by changes in the tax system. (C) 1999 Elsevier Science B.V. All rights res
erved. JEL classifications: C15; E24; J60.