Holmlund & Lindin (1993) analyse the usage of relief employment using a matching model with three stocks regular employment, relief employment, and unemployment. In their model, the usage of relief jobs has both a direct effect on unemployment (i.e., the placement effect) as well as an indirect wage effect on unemployment. The former relationship is negative. The latter effect refers to the change in wage setting which is in response to changes in how relief jobs are used. Holmlund & Lindin argue that the only usage of relief jobs which unequivocally reduces unemployment is the policy of directing relief jobs at the flow out of regular employment. They show that by using relief jobs in this way, the negative direct effect on unemployment is reinforced by a negative indirect wage effect on unemployment. In this paper, we argue that Holmlund & Lindin's concept of workers' fall-back position is mis-specified since it fails to take account of the wage bargaining undertaken by those in relief employment. And it is this mis-specification which drives their result. Once due consideration is made for those in relief employment, their result no longer holds.
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