Do Labour Market Programmes Necessarily Crowd out Regular Employment? A Matching Model Analysis

It is often claimed that the usage of labour market programmes will necessarily crowd out regular employment (see, for example, Holmlund & Lindén (1993)). As a result, it could be argued that, despite their probable negative impact on unemployment, the overall benefits of using labour market programmes may in fact be dubious. In this paper, we show that the usage of labour market programmes need not necessarily crowd out regular employment. On the contrary; we find that there is the possibility of crowding in regular employment, thereby reducing total unemployment. This can be strengthened by using labour market programmes in conjunction with a strict unemployment benefit policy.