Institutional Labour Economics, Benefit Levels and Unemployment

Moira Wilson

An analytical framework that has had an important bearing on setting benefit levels is the income-leisure model, whereby the labour supply behaviour of any individual is governed by a trade-off between income from work and leisure time.

A higher level of income support encourages people to choose not to work, which is reflected in a greater propensity to become unemployed ? and to remain unemployed. The obvious policy conclusion is that if the level of income support for the unemployed is lowered, the attractiveness of unemployment will be reduced and people will seek to support themselves through employment.

This paper aims to show that the relationship between unemployment and labour supply is much more complicated than this model implies, and that lowering the level of income support may or may not reduce overall levels of unemployment. To show this, the paper assembles an alternative framework for analysing labour supply behaviour by drawing on institutional theories of the way the labour market works.

The paper concludes by highlighting the very different policy prescriptions that flow from adopting the income-leisure framework and the institutional framework, and warns against an unthinking acceptance of the former for setting benefit levels.