Download Labor market policy

Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Successes and Failures of
Labor Market Policy in Europe
Jochen Kluve
(RWI Essen, Germany)
Colombia Employment and Development Conference
Bogotá, November 14, 2008
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
Majority of countries worldwide has implemented certain labor
market policies: unemployment benefits, training for the
unemployed, etc

While labor markets are heterogeneous by country, these policies
are similar, and their general objective is the same: increase
employment, reduce unemployment

Important for countries to learn from each other’s experience

Europe: many different countries within relatively small space,
many experiences with different labor policies
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Introduction
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Today‘s presentation

European labor markets: Unemployment and policy spending

Passive and Active Labor Market Policy

Knowledge on ALMP effectiveness

Types of countries

Systematizing the evidence: Meta-analysis

Failures and successes
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J Kluve
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ni S ain
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d ed
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m
C
(
EU 25)
(1
5)
EU
in %
16
14
12
10
8
2006
2007
6
4
2
0
Source: Eurostat
5
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Unemployment in Europe
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d ay
St
at
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ze Be tria
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et Ita
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ni S ain
te we
d
Ki den
ng
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m
C
Au
(
EU 25)
(1
5)
EU
in %
35
30
25
20
2006
2007
15
10
5
0
Source: Eurostat
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Youth unemployment in Europe
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Ja
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U No an
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d ay
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d ed
Ki e
ng n
do
m
C
(
EU 25)
(1
5)
EU
in %
12
10
8
6
2005
2006
4
2
0
Source: Eurostat
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Long-term unemployment in Europe
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
European labor markets: overview
Unemployment in 2005:
EU-15: 8.0%
EU-27: 8.9%
14 Mio., of which 4.7 Mio. LTU
19.3 Mio., of which 7.9 Mio. LTU
Spending (2003):
EU-15: 65 Bio. Euros on active labor market policy = .75% of GDP
25 Bio. Euros on training programs
126 Bio. Euros on passive labor market policy
(Eurostat)
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
“Passive” labor market policy

“Out-of-work income maintenance and support”, i.e.
unemployment benefits and unemployment assistance

Early retirement schemes

Administration of the Public Employment Services (PES)
 ”Administering unemployment”
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1. (Labor market ) training: human capital accumulation
2. Private sector incentive programs: employer and worker behavior
3. Direct employment in public sector: public job creation
4. Services and Sanctions: job search efficiency
5. Youth programs
6. Measures for the disabled
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Types of Active Labor Market Programs
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
EU spending by program type
0,3
0,25
0,2
0,15
0,1
0,05
0
Total LMP
services
Training
Job rotation
and job
sharing
Employment
incentives
Integration of
the disabled
Direct job
creation
Start-up
incentives
Source: Eurostat
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For a particular country:
Labor market policy
 Types of Active Labor Market Programs
 Design of the unemployment insurance system (passive support)
 Interaction of the active and passive systems (sanctions, “rights
and duties”)
Evaluation practice
 Data collection
 Academic and government-sponsored research
 Policy interest in learning about program effectiveness
[Countries are heterogeneous  systematize information]
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Knowledge on ALMP effectiveness
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Northern
Europe
Western
Europe
Eastern
Europe
Southern Europe
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
“Northern Europe”
Labor market policy
 Comprehensive use of Active Labor
Market Programs (Sweden: since the 1970s)
 Generous unemployment insurance
system (Denmark: 90% replacement rate)
 Program participation ultimately
compulsory for the LTU
Evaluation practice
 Comprehensive data collection (administrative)
 Multitude of academic evaluation studies
 Changes in policy? To some extent
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Labor market policy
 Less comprehensive use of
Active Labor Market Programs,
but still substantial spending
 Fairly generous unemployment insurance system
 Many countries (e.g. Germany, Netherlands, UK) have introduced
sanction elements over the last decade
Evaluation practice
 Less established, mostly triggered by EU, in some countries
rapidly evolving (Germany)
 Increasing number of academic evaluation studies
 Changes in policy? Unclear
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
“Western Europe”
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
“Southern Europe”
Labor market policy
 Little use of Active Labor Market Programs, often regionally
focused
 Less generous unemployment insurance system
Evaluation practice
 Program evaluation rather uncommon
 Some academic evaluation studies exist
 Little is known on ALMP effectiveness
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Labor market policy
 After breakdown of Communist regimes, systems of active and
passive support built from scratch, often copying Western systems
 Little use of Active Labor Market Programs in most countries, some
exceptions are Romania and Poland (in the 1990s)
 Unemployment insurance
system offers basic support
Evaluation practice
 Program evaluation rather uncommon
 Some academic evaluation studies exist
 Little is known on ALMP effectiveness
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
“Eastern Europe”
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H
ar
y
lic
2
1,8
1,6
1,4
1,2
1
0,8
0,6
0,4
0,2
0
2004
2005
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
un
g
ub
ly
ai
n
Ita
Sp
s
y
er
la
nd
Re
p
et
h
ze
ch
N
ar
k
en
m
an
en
m
G
er
D
Sw
ed
Spending on ALMP in Europe (%GDP)
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
How to systematize the evidence

Meta-Analysis: Collect evaluations of Active Labor Market
Programs from all over Europe (following certain requirements)
 137 studies

For each study: Does the evaluation find a positive, negative, or
zero effect of the program (on employment)?
[75 +, 33 Ø, 29 –]

Then analyze if there is a systematic pattern by program type:
1. Training
(70)
2. Private sector incentive programs
(23)
3. Public sector job creation
(26)
4. Services and Sanctions
(21)
5. Youth programs
(35)
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For each country:
Labor market institutions
 Gross replacement rate
 Regulation on dismissal protection
 Regulation on fixed-term contracts
 Regulation on temporary work (OECD indexes)
Economic context
 Unemployment rate
 ALMP expenditure as % of GDP
 GDP growth
Study design (method, sample size)
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Other factors that may influence effectiveness
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Results: ALMP effectiveness in Europe
Picture emerging from analysis surprisingly clear-cut:

Little systematic relation between program effectiveness and
contextual factors

Exception: restrictive dismissal regulations

Instead: the program type matters
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
Direct job creation in the public sector very rarely has a positive
effect on participants’ employment probability. Quite the opposite:
effects are frequently negative.

Training programs have mixed effects, but generally tend
towards positive impacts (see “successes” next slide), though
maybe not as clearly / strongly as one might have hoped for.

Young people seem to be particularly hard to assist. Indeed,
most youth programs fail. Perhaps ALMP is not the right type of
policy for this group  Preventive measures.
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Failures?
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Successes?

Training programs are modestly effective on average. There is
some indication that impacts materialize in the longer run
(human capital accumulation).

Private sector incentive schemes such as wage subsidies and
start-up grants generally show positive effects.
Caveat: Not much is known about substitution or displacement
effects and deadweight loss.

“Services and Sanctions” seem particularly successful:
Apparently many unemployed can be helped with basic job
search assistance measures. Also, sanction elements mobilize
the unemployed. These measures are also likely cost-effective.
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