Simulating the Economic Effects of an Employer of Last Resort Program for Austria

Abstract

Unemployment in Austria has increased considerably since the late 1970s, reaching its climax during the recent Covid-19 crisis with 409,639 individuals being registered unemployed in 2020. Conventional policy instruments appear insufficient to effectively address the persistent rise in unemployment over the decades. An increasingly prominent policy approach is the employer of last resort (ELR) which offers public employment at a base wage to everyone willing and able to work. The aim here is to simulate the economic effects of an ELR covering all registered unemployed people in Austria in 2020 using a static input-output model. The channel through which the ELR operates is the additional income generated by employing the unemployed. This income is assumed to translate into household consumption expenditure, ultimately spurring aggregate demand. The simulation results indicate that in a middle-bound scenario with respect to the programme wage, the ELR would raise output (Produktionswert) by 2.2% of GDP, value added by 0.9% of GDP, employee compensation by 0.4% of GDP and non-ELR employment by a total of 36,000 full-time equivalents. The results indicate that implementing an ELR programme would not only remove involuntary unemployment but also be accompanied by beneficial macroeconomic effects.