Labour Market Policies and Long‐term Unemployment in a Flow Model of the Australian Labour Market

Abstract

This paper develops a general equilibrium job matching model, which is used to assess the impact of active labour market policies, reductions in unemployment benefits and reductions in worker bargaining power on long-term unemployment and other key macro variables. The model is calibrated using Australian data. Simulation experiments are conducted through impulse response analysis. The simulations suggest that active labour market programs (ALMPs) targeted at the long-term unemployed have a small net impact and produce adverse spillover effects on short-term unemployment. Reducing the level of unemployment benefits relative to wages and worker bargaining power have more substantial effects on total and long-term unemployment and none of the spillover effects of ALMPs.

Vacancies and Unemployment in Australia

“…There are only a limited number of studies applying a search model of the labour market in the Australian context. Herbert and Leeves (2003) formulate a model for Australia that additionally incorporates movement of persons into and out of the labour force. However, the motivation of their study is to assess the impact of Australian labour market programs targeted at the long‐term unemployed rather than evaluating the ability of the model to account for business cycle facts.…”