In the recent discussion of European unemployment, increased attention has been paid to so-called labour market policies. These are usually taken to include measures to facilitate the contracts between jobs seekers and employers as well as various job creation and training programmes. The motivation for labour market programmes is to preserve or even enhance the skills of workers that would otherwise be unemployed. The idea is to increase the competition for jobs and thus restrain wages. In most countries, labour market programmes have been relatively unimportant. The Swedish labour market policies have been advanced as a major explanation of low unemployment and as a blueprint for others to follow. We shall argue that the main effect is to increase wages because disemployed workers are presented with an attractive alternative to open unemployment, thus weakening the incentives for wage moderation. If this reduction is big enough, labour market programmes may even fail to reduce open unemployment. We outline a simple model of union wage setting, which focuses on how labour market programmes increase the expected utility of disemployed workers. Section I gives some basic facts about wage setting, unemployment, and labour market programmes. Section II presents the theoretical model. The basic regressions are presented in section III, while section IV discusses the implications for employment. Section V summarises the results. -from Authors
