Making Work Pay: Policy Choices and Interactions with Existing Instruments

Policy interventions generally have both desirable and undesirable effects on the efficiency and/or equity of market allocations. The balance between the former and the latter depends importantly, for each instrument, on the scope and elasticity of market reactions to its introduction, which in turn depend on the pervasiveness and character of policy intervention along the margins where such reactions may take place. Thus, specific policy choices are difficult to evaluate or indeed rationalize in isolation. The general aims of labor-market policy intervention are pursued by different and often quite complex packages of interacting instruments. Each country’s current and past choices of policy instruments reflect structural features of its labor market on the one hand, and political considerations as to the relative weight of each policy’s desirable and undesirable effects on the other.