Employment policy in a dynamic labour market: simulations using a multifirm flow model

We illustrate the propagation at the macro-level of various types of policy impulses and institutional changes. Simulations with a multifirm model representing a miniature economy shed new light on the working of labour market policies. We find evidence of the cleansing effect of cyclical volatility, provided that volatility is not too large. A reduction of external search costs appears beneficial to employment, but, in contrast to some arguments in discussions about labour market sclerosis, a reduction of firing costs is not. Moreover, enhancing productivity of highly skilled workers appears more effective than a general policy-induced rise in workers' skills. © 2003 Elsevier B.V. All rights reserved.