Employment Policy in Small Open Economies

The current business cycle outlook for Europe does not suggest that in the near term, unemployment will fall significantly from the high level to which it has risen in the 1993 recession. A major reason is that economic growth is not sufficiently strong for labor demand to outpace labor supply plus productivity. It is mainly on a European level that policy may nowadays shape the forces of growth. Still, small open economies do have some scope for action in policy, by influencing the employment intensity of growth on the one hand, or the behavior of labor supply, on the other hand. Starting in 1993, Denmark has introduced a number of labor market policy reforms. Among these is the unpaid model, which has caught considerable attention beyond the national borders. Thereby, employees may take leave for up to one year from their job, be it for further education, child care or a sabbatical (for purposes not further specified). During that time, they may claim 60 to 80 percent of their unemployment insurance entitlements. Their replacement by (long-term) unemployed is subsidized by the public authorities. In the Netherlands, economic growth during the second half of the 1980s was more labor intensive than in most other countries. This was primarily due to a sizeable increase in part-time work. However, the effects on the level of unemployment were negligible. In order to reduce the jobless figure, policy mainly resorted to a relaxing of eligibility criteria for early retirement and disability benefits. The high costs of the latter and their passive approach to the problem have prompted reform measures in recent years. Sweden enjoyed full and a high degree of labor force participation until the early 1990. Efficient and de-centralized labor market services ensure a smooth exchange of job seekers and vacancies; an elaborate network of training schemes provides access to new qualifications for all unemployed and prevents long-duration joblessness. Wage subsidies and public hiring are targeted towards integrating problem groups (handicapped, youth) into the labor market. In 1991 to 1993 a deep economic and budgetary crisis occured. Unemployment jumped to a rate of 8 percent. In such a situation, active labor market policy, is overburdened with the task of fighting the large cyclical part of unemployment.