Labor market policies succeed or fail at least in part depending on how well they reflect or account for behavioral responses. Insights from behavioral economics, which allow for realistic deviations from standard economic assumptions about behavior, have consequences for the design and functioning of labor market policies. We review key implications of behavioral economics related to procrastination, difficulties in dealing with complexity, and potentially biased labor market expectations for the design of selected labor market policies including unemployment compensation, employment services and job search assistance, and job training.Keywords: Behavioral economics, Unemployment insurance, Job training, Job search JEL: D03, D04, J08, J24, J64, J65
Background and motivationThe Great Recession of 2007 to 2009 and its aftermath have been a trying period for American workers. The U.S. unemployment rate reached double digits in late 2009 for the first time in over a quarter of a century and has remained over 8 percent through mid-2012. Real compensation growth has all but stalled. The human costs of labor market turbulence have rarely been clearer, and the value of public policies, such as unemployment insurance and job training programs, that assist workers in managing that turbulence, gaining new skills, and navigating the labor market have rarely been more apparent. Similar problems of persistent joblessness have been apparent in most major economies in recent years.Even in the best of times, the United States' labor market is a dynamic and turbulent one with high rates of turnover (over five million separations and five million new hires in a typical month in normal times) but substantial frictions as well. As a result, labor market programs and regulations are key components of economic policy. Such policies help support the unemployed, provide education and training opportunities, and ensure the fairness, safety, and accessibility of the workplace. The challenge for policymakers in the United States and elsewhere is to design such policies so that they meet these goals as effectively and as efficiently as possible.Labor market policies succeed in meeting their objectives, however, only to the extent that they accurately account for how individuals actually make decisions about work and leisure, job search, and education and training. To a substantial extent such