EC-IILS Joint Discussion Paper Series No. 6

How to deal with the job crisis?

The aim of this note is to present an overview of the current understanding of the role of fiscal policy in promoting an employment recovery, taking into account different labour market characteristics such as segmentation and different wage bargaining institutions. Specifically, the note discusses the resilience of economies with segmented labour market. Regarding fiscal policy, it demonstrates that wage bargaining institutions that also include hours worked in their bargaining process typically leads to improved employment outcomes, despite the fact that output and real wages are reacting in a similar fashion. Finally, the note discusses the importance of targeted active labour market policies in promoting employment creation: When such policies specifically increase search effort of the unemployed, their effectiveness is multiplied in comparison to a general spending increase that gets diluted in the economic system.