Labor market policy is a third arena in which divergent trajectories of liberalization are evident and have a profound impact on equality and social solidarity. Governments influence the operation of labor markets in a wide variety of ways. The political economy literature puts heavy emphasis on employment protection legislation and unemployment benefits, and for good reason. Employment protection legislation affects the ease with which employers can lay off workers, and the level and duration of unemployment benefits influence the incentives that workers face in the market. These factors play a role in my analysis as well, but in this chapter I focus attention more on two other types of policies through which governments influence the operation of labor markets: active labor market policies (ALMPs) and short-time work (STW) policies.

Of the two, ALMPs have captured the lion's share of attention. Following Katz (1994), the term refers to “measures targeted at the unemployed and disadvantaged (low-wage) workers with the intent of improving the functioning of the labor market” in one of three ways: by investing in education and training to upgrade these workers’ skills, by stimulating employment either through direct job creation in the public sector or through subsidies to the private sector, and by facilitating reintegration into the labor market by assisting the unemployed in job searches and by matching them to openings (259). Although in fact their distributive effects vary significantly depending on which of these facets is emphasized, most observers see ALMPs as outsider-oriented in that the spending is targeted at those at the low end of the skill spectrum and the unemployed (Rueda 2007; Martin and Swank 2012).