Saturday, 7 November 2009

Calmfor’s Iron Law of Active Labour Market Policy.

Amongst the billion words of hot air a day that is written on economics worldwide, it is worth remembering the basic laws of economics. Some are as beautiful and simple as E=MC2.

Lars Calmfors is a Swedish economist whose main interest is labour makets. His iron law of Active Labour Market Policy (ALMP) refers to a characteristic of make work schemes, like the WPA that operated in the United States in the 1930s.

The characteristic or problem with these schemes is that if people are attracted to these schemes by generous pay or conditions, their motive to search for regular work is necessarily reduced.

Assuming unemployment is anywhere near NAIRU, the effect of this reduced aggregate labour supply will be inflationary, which means that demand will have to be reduced, which in turn means that the jobs created by the make work scheme will be, at least to some extent, at the expense of regular jobs.

Alternatively, if people are coerced into joining make work schemes because of what might be called a “workfare” sanction, their job search efforts are not reduced, thus the jobs created by the make work scheme have a better chance of not being at the expense of normal jobs.

Of course to get this beneficial effect, the make work employment must not hinder the job searching. But the majority of job changers in the US find (or at least used to find) their new jobs before leaving their old jobs, so job searching at the same time as working cannot be too difficult.* Also the actual time so called job searchers spend looking for work per week is minute: no excuse for taking the entire week off.

And that is the “iron law”: attract people to WPA type schemes by generous pay etc, and the price will be that these jobs are at the expense of normal jobs.

* J.P.Mattila produced evidence on the proportion of job changers finding their new job before quitting their old job: “Job Quitting and Frictional Unemployment”, American Economic Review, March, pp. 235-39.

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