ABSTRACT
This chapter continues the search for policy measures that “improve” the performance of the labor market during a business cycle. Standard stabilization policies that rely on moving aggregate demand for goods and services to the point where full-employment output is achieved were found not to meet the requirements of Pareto efficiency. Therefore, we will investigate policies that operate directly in the labor market. First, the general notion of “job-creation programs” that stimulate employment through subsidies, tax relief, or direct government hiring will be explored. Second, the possibility of the government as employer of last resort at a prespecified wage rate will be analyzed. Third, the difficulty of obtaining any optimality in policy choices in the face of a conflict over property rights and economic rents will be discussed.
