November 2, 2014
Abstract: The Tinbergen assignment rule, when applied to policy formulation, holds that at least as many policy instruments should be utilized as targets to be achieved. If one instrument is used to achieve two targets, there is a very real possibility of perverse consequences. This is illustrated with the example of the labour market in Rajasthan. The government mandated that firms should provide formal employment contracts (one instrument) as a way to create more jobs and unemployment insurance (two targets). The approach backfired as firms became less competitive as they had to bear all the costs and responded by hiring labour without formal contracts. The workable approach would have been to distribute the costs between the employee (insurance premium), employer (a tax) and the government (support guarantees).
Keywords: Tinbergen principle; labour markets; cost-sharing