Abstract
In this paper, I extend the analysis of Millard and Mortensen [1996] to account for the cyclical effects of labour market policy, in particular concentrating on the effects of the unemployment benefit system and employment protection legislation. As in Millard and Mortensen [1996], I find that both policies are welfare reducing, in the sense of reducing aggregate consumption, and both significantly increase the mean unemployment rate. I find that the existence of employment protection helps smooth aggregate consumption whereas unemployment benefits do not. In addition, I find that both policies lead to an increase in the unconditional variance of the unemployment rate. This results from the large increase in persistence occasioned by both policies.
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