The effects of labour market policies when there is a loss of skill during unemployment

In this paper, we analyse the labour market using a matching model. In our labour market, there are two types of workers: primary workers; and secondary workers. Primary workers are those workers who, when in employment, are fully productive and, when in unemployment, have a maximum search intensity. Secondary workers, on the other hand, may be less than fully productive when employed. In addition, they may have a lower search intensity than primary workers when unemployed. A primary worker becomes a secondary worker by first spending a length of time in unemployment. Thus the event of an unemployed primary worker becoming a secondary worker is duration dependent. An unemployed secondary worker can become a primary worker by either first being employed as a secondary worker or by taking a place on a labour market programme. However, in this model we allow for the possibility that taking a job or a place on a labour market programme may not guarantee that the worker will become a primary worker. In this paper, labour market programmes are directed at secondary workers in unemployment. The general result of this modus operandi is ambiguous. The proportion of primary workers, the proportion of secondary workers, and the rate of total unemployment can all either increase, decrease, or remain unchanged, when labour market programmes are used more intensively. The same is true of total production in the econom