Flexicurity, education and optimal labour market policies

Abstract

AbstractThe paper provides a theoretical rationale for flexicurity policies, consisting of low employment protection, generous unemployment insurance and active labour market programmes. Education efforts give access to high productivity firms, more likely to survive and thus exposing less their workers to unemployment risk. Activation programmes support reallocation from risky and unproductive to safer and more productive firms, reducing unemployment. Low employment protection can provide incentives for self‐insurance against unemployment risk through education, mitigating the moral hazard cost of unemployment insurance and activation programmes. The paper identifies conditions for flexicurity to be optimal and confronts theoretical predictions to the data.