What if supply-side policies are not enough? The perverse interaction of flexibility and austerity

In this work we develop a set of labour market and fiscal policy experiments upon the labour- and credit-augmented “Schumpeter meeting Keynes” agent-based model. The labour market is declined under two institutional variants, the “Fordist” and the “Com- petitive” set-ups meant to capture the historical transition from the post-WWII toward the post Thatcher-Reagan period. Inside these two regimes, we study the different effects of supply-side active labour market policies (ALMPs) vs. demand-management, passive labour market ones (PLMPs). In particular, we analyse the effects of ALMPs aimed at promoting job search, and at providing training to unemployed people. Next, we compare the effects of these policies with unemployment benefits meant to sustain income and therefore aggregate demand. Considering the burden of unemployment benefits in terms of the public budget, we link such provision with the objectives of the European Stability and Growth Pact. Our results show that (i) an appropriate level of skills is not enough to sustain growth when workers face adverse labour demand; (ii) supply-side policies are not able to reverse the negative interaction between flexibility and austerity; (iii) PLMPs outperform ALMPs in reducing unemployment and workers’ skill deterioration; and (iv) demand-management policies are better suited to mitigate inequality and to sustain long-run growth.