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Journal of Economic Integration 2005 September;20(3) :419-438.
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
Copyright ©2005 Journal of Economic Integration
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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