European Economic Integration and the Effectiveness of Employment Policies

Fung, K.C.; Lin, Chelsea C.; Maechler, Andrea M.

doi:2005.20.3.419

The Journal of Economic Integration 2005 September;20(3) :419-438.
DOI: https://doi.org/10.11130/jei.2005.20.3.419

European Economic Integration and the Effectiveness of Employment Policies

K.C. Fung, Chelsea C. Lin, Andrea M. Maechler,

University of California, Santa Cruz
National Dong Hwa University
International Monetary Fund

ABSTRACT

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.

JEL Classification

F15: Economic Integration
F42: International Policy Coordination and Transmission
L51: Economics of Regulation

Keywords: European unemployment | Economic integration | Labor market structure

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