An Exploration of Policies to Mitigate Unemployment Through the Lens of Behavioral Economics

Abstract

The effectiveness of labor market policies in achieving a low unemployment rate and short unemployment spell depends on the extent they reflect or account for behavioral responses. Insights from behavioral economics demonstrated realistic deviations from traditional economic assumptions of rational behavior. This paper examines the effect of status quo bias, anchoring and insufficient adjustment, and implicit discrimination in the labor market. The underlying behavioral implications of phenomena such as deferred decisions, complexity in choices, and labor market expectations are discussed with substantial evidence from seminar papers and empirical observations. The paper also proposes ways in which heuristics may be employed in employment services, unemployment compensation, and job training to smoothen the labor market’s operation, reducing unemployment.