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One of the things Sweden has been famous for is "active labor market policy," as my favorite US economics journalist Robert Kuttner talks about in his book The Economic Illusion: False Choices Between Prosperity and Social Justice.

In the 1950s, Sweden was trying to find a way to maintain full employment without the high inflation that conventional Keynesian taxing and spending policies generated. Part of the solution was selective interventions in labor markets to soak up unemployment.

A national labor market board was charged with coordinating job training, relocation, placement, and job creation policies. Local boards made up of business, labor, and government representatives designed local programs that the national board would fund. During recessions (for example in the 1970s) the boards could expand temporary public service employment, early retirement packages, and retraining sabbaticals to reduce unemployment. High local unemployment rates could be dealt with through relocation subsidies to workers or wage subsidies to firms who moved into the area. At some points the boards were spending up to 3% of GDP.

This is the classical social-democratic version of "active labor market policy." It was clearly designed to impart "flexibility" into local and national labor markets, but in a way that preserved worker living standards rather than thwarting them.

Economists who have tried to find statistical correlations between these policies and employment indicators usually have had some trouble doing do. There is usually a somewhat positive correlation, but it is often "statistically insignificant," i.e. the data are so variable that they do not permit a solid conclusion that there is a strong positive effect of active labor market policy on employment.

For example, ALMP did not prevent the Swedish unemployment rate from skyrocketing to double digits in the early 1990s, although during the 1980s Swedish policy had become more "passive" (e.g. simply paying benefits to the unemployed). In the 1990s there was more emphasis again on programs like retraining and wage subsidies, and unemployment did come back down. In all, ALMP is still an important part of economic policy in Sweden, but in a somewhat leaner form than in the 1970s.

So making continental unemployment insurance systems more "active" may be part of the answer to unemployment, but probably not the whole answer.

The other problem with modern discussions of ALMP is that all sorts of undesirable policies are now collected under that label. For example, the US welfare "reform" of the mid-1990s could be described as an "active labor market policy," but one that emphasizes the stick - pushing people to accept any low-wage job that comes along - rather than the carrot of policies that invest in human capital and create better jobs.

by TGeraghty on Sun Oct 23rd, 2005 at 07:42:33 PM EST
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