Labour Market Policies in Times of Crisis: A Reaction Function Approach for the Period 1985–2010

This article examines the reaction function of labour market expenditure to unemployment in 24 OECD countries, over the period 1985–2010, using the OECD panel data. The level of public debt is also introduced as a factor that is likely to influence these expenditures. Using a fixed‐effect model with interaction terms, this research focuses on two periods of crisis (1992–93 and 2007–09). The results confirm the counter‐cyclical variation of labour market policy expenditures. Nevertheless, the sensitivity of labour market expenditure to the economic cycle has in general decreased and the policy mix has changed. This could result from the important labour market reforms undertaken in the last 20 years.