1
What works among active labour market policies

• David Grubb
• Directorate for Employment, Labour and Social
  Affairs, OECD
• February 2007

2
Outline

• Benefits without active measures increase
  unemployment, especially if replacement rates are
  high. Effective active measures reduce
  unemployment. Both types of impact can be large.
• Classic active measures include labour market
  information and ALMPs (training, job creation and
  hiring subsidies).
• Activation measures include
• (Traditional) direct referral/placement into job
  vacancies
• Other PES interventions in the unemployment
  spell
• Compulsory participation in ALMPs
  (workfare/trainingfare)
• Focus on the limits encountered by high-benefit
  countries
• A few slides consider employment rate outcomes

3
The impact of benefits

• Simple hazard rate graphs show that limits on UI
  duration considerably affect behaviour (Chart).
• When UI duration is 14 months the hazard rate
  increases throughout months 10-16? search
  frictions are significant. But employable people
  can usually find work within 6 months.
• Similar spikes are found in studies from other
  countries.

4
Monthly rate of entry to employment when the
duration of UI benefit was 14 months, France
For four levels of earnings prior to unemployment
Source Dormont et al, as cited by OECD
Employment Outlook 2005
5
The impact of benefits (2)

• Better-quality studies of the impact of
  replacement rates suggest a fairly large
  elasticity of job entry rates rates with respect
  to replacement rates, e.g. -0.7. But such a
  number is only part of the story
• Benefits influence rates of entry to
  unemployment, as well as rates of exit
• Studies estimate short-run impacts, holding
  institutions and social attitudes to unemployment
  near-constant
• Caseload growth for new (i.e. much more generous)
  assistance benefits has typically continued for
  15 to 20 years (e.g. see OECD, 2003). The
  long-run impact is often around 3 times the
  short-run impact, as judged by caseloads after 20
  years vs. the first few years.

6
History of UI systems and active measures

• Finland (1971), Luxembourg (1976), Sweden (1974)
  and Switzerland (1976) introduced their current
  (much more generous) unemployment insurance (UI)
  benefits late. They suffered sharp increases in
  unemployment late, in the 1990s i.e. again
  caseload growth took about 20 years. (Chart).
• Finland and Sweden spent heavily on active labour
  market programmes (ALMPs) before the 1990s, but
  in itself that didnt help.
• The modern activation strategies were often
  adopted when other measures had been tried but
  unemployment was high or still rising.

7
Unemployment in four countries which introduced
generous unemployment benefits after 1970
other Western Europe
Finland, Sweden
Switzerland, Luxembourg
8
The direct impact of ALMPs

• Evaluations have identified modest direct impacts
  (impacts on employment-related outcomes of
  participants) from ALMPs. Perhaps slightly
  positive for training programmes, none or even
  negative for job creation. Impacts tend to be
  more positive for adult women than for youth or
  adult men.
• Training programmes sometimes do better when
  outcomes are tracked over a longer period ? but
  scope for large-scale implementation of
  specialised training remains limited
• Hiring subsidies are often found effective by
  evaluations using non-experimental (matching)
  estimators ? but other studies continue to show
  deadweight effects (Boockmann et al., 2007).
• Job-search assistance programmes are often found
  to be relatively effective in relation to their
  low cost.
• Reference Martin and Grubb (2001).

9
Indirect effects of ALMPs

• ALMPs can have a large impact through their
  interaction with the benefit system
• Carousel effects when ALMPs re-qualify
  participants for unemployment benefits.
• Motivation effects when participation in ALMPs
  is compulsory for long-term benefit recipients.
• Some channels of impact are rarely identified
  statistically
• A general change in expectations that affects
  most labour market groups and unemployment
  durations.
• Impact on rates of (re)entry to unemployment
• Social interaction effects, i.e. impacts on the
  behaviour of the non-participants in the
  programme.
• Reference OECD Employment Outlook 2005

10
Activation through regular interventions in the
unemployment spell

• In Australia, the UK and the US (Welfare Reform)
  activation strategies rely on regular
  interventions" in the unemployment spell
• personal contact with jobseekers
• intensive interviews and individual action plans
• job-search requirements and monitoring
• job-search training
• direct referrals to job vacancies
• sanctions
• ? These strategies limit benefit caseloads, with
  only a small proportion of the unemployed being
  referred to expensive (full-time) programmes.

11
Activation through participation in labour market
programmes

• In Denmark, Finland and Sweden activation often
  involves referral to a full-time ALMP. In
  Denmarks active period (in the strategy as of
  about 2000) after a year the unemployed person
  had to participate in an ALMP 75 of the time.
• Germany and the Netherlands also spend heavily on
  ALMPs.

12
The limits of activation strategies

• Australia and the UK have moderate benefit
  replacement rates (net 50 to 65 over a
  five-year spell of unemployment) (Chart). They
  spend about 1 of GDP on LMPs (0.4 of GDP for
  active programmes).
• Austria and Norway have intermediate replacement
  rates. So far they managed to avoid a major
  unemployment crisis and keep spending on LMPs at
  about 2 of GDP.
• The seven OECD countries (Denmark, Finland,
  Germany, Luxembourg, Netherlands, Sweden,
  Switzerland) with the highest replacement rates
  (75 or more over a five over a five-year spell
  of unemployment in 2002, 2004 data) find it
  relatively difficult and expensive to get good
  results.

13
Average of net replacement rates over 60 months
of unemployment, including social assistance
2004, for four family types and two earnings
levels, in percentage
14
In the high-benefit countries

• High spending on ALMPs (e.g. Sweden, Finland
  before 1990 and Germany in the 1990s) did not
  prevent unemployment from rising further, to
  postwar peak levels.
• Total LMP spending is very high in several cases
  (3.0-4.5 of GDP in Denmark, Finland, Germany and
  the Netherlands).
• A large immigrant-native differential in
  unemployment and employment rates (Chart) is
  proving hard to tackle.
• Strict workfare/trainingfare" requirements seem
  to be needed for the management of social
  assistance (Kildal, 2000 Thoren, 2005, describes
  some Swedish schemes).
• Experimentation continues, e.g. privatisation of
  employment services in Denmark, the Activity
  Guarantee" in Sweden, and controversial benefit
  cuts.

15
Unemployment rates of non-EU immigrants vs.
natives
Source Jean (2006)
16
Avoiding programme dependency

• When referral to ALMPs is a key element in an
  activation strategy, one issue is how to avoid
  programme dependency - when some unemployed
  people prefer ALMPs (rather than passive
  benefits) to market work.
• Employer demand for subsidies should not be
  allowed to drive growth in ALMPs.
• Subsidised employment positions should pay less
  than market work.
• Potential programme careers should be
  interrupted by short intervals in open
  unemployment with a focus on job search and
  renegotiation of the individual action plan, as
  in Denmark.

17
Improve PES performance

• The Public Employment Service (PES) implements
  regular interventions, so this type of
  activation strategy depends on PES performance.
• The PES may tend to limit itself to bureaucratic
  routines and intermediation (matching willing
  workers with employers).
• An ineffective PES may remain so for long
  periods, since clear evidence of poor performance
  is absent.
• The biggest policy reforms have often involved
  not only legislation but also PES restructuring -
  new financing arrangements, new objectives, new
  management.

18
Performance management

• Structure PES operations to
• Measure the performance of different employment
  offices in terms of entries to employment (of
  minimum duration, at least 3 months) achieved by
  their clients.
• Compare employment outcomes across employment
  offices, and reform underperforming operations
• A quasi-market or subcontracting approach, where
  regular interventions are implemented by
  provide providers works well in Australia and
  arguably also in the UK (Employment Zone
  providers are benchmarked against outcomes
  achieved by the PES with comparable client
  groups).
• Performance measurement in the PES has some
  (perhaps more limited) impact even without
  subcontracting.
• Reference OECD Employment Outlook 2005

19
Activation of "non-employment" benefits

• Non-employment benefits are those paid without
  an availability-for-work condition. Activation
  may involve
• Specific measures, e.g. employer financial
  responsibility for their employees sickness pay,
  work rehabilitation measures for medical
  conditions, child care provision for lone
  parents
• Abolition (e.g. phasing out an early retirement
  benefit) or stricter gatekeeping (e.g. for
  disability benefits). Some potential
  beneficiaries then claim unemployment benefit
  instead.
• Introduction of an availability-for-work
  condition (e.g. for lone parents with children
  above a certain age, partners in a couple
  receiving a minimum income benefit, some groups
  in receipt of a disability benefit).
• Reference Carcillo and Grubb (2006)

20
Low unemployment as a precondition

• The PES is effective when most benefit spells are
  kept shorter than 6 months.
• If benefit spells become longer, job-search
  motivation is difficult to maintain and the
  potential disincentive effects of high benefits
  act more strongly.
• Success in managing the pre-existing unemployed
  caseload is a precondition for activation of
  non-employment benefits by adding an
  availability-for-work condition.
• If the PES is overwhelmed by a transfer of new
  hard-to-place clients, the net effect may be
  negative.

21
Employment rates

• Small variations in unemployment rates are
  associated with larger variations in labour force
  participation rates (Chart). ? Policies which
  keep unemployment low also (a) attract potential
  workers into the labour force (b) facilitate
  restrictive management of non-employment
  benefits.
• For certain outliers such as Belgium (with a
  60 employment rate, far below 72 in Canada
  which has a similar unemployment rate),
  non-employment benefits (e.g. early retirement
  benefits) are a factor.
• Evidence about other factors influencing
  employment rates is relatively uncertain. Two
  suspects are employment protection (EPL) (? low
  employment rate) and progressive taxation of
  individual incomes (? high employment rate).

22
Employment and unemployment rates, 2000-5
23
References

• Boockmann, B., T. Zwick, A. Ammermüller and M.
  Maier (2007), Do Hiring Subsidies Reduce
  Unemployment Among the Elderly? Evidence From Two
  Natural Experiments, ZEW Discussion Paper no.
  07-001
• Carcillo, S. and D. Grubb (2006), From
  Inactivity to Work The Role of Active Labour
  Market Policies, SEM Working Paper no. 36
  (www.oecd.org/els/workingpapers).
• Dormont, B., D. Fougère and A. Prieto (2001),
  Leffet de lallocation unique dégressive sur la
  reprise demploi, Économie et Statistique, No.
  343, pp. 3-28
• Graversen, B. and J. van Ours (2006), How to
  Help Unemployed Find Jobs Quickly Experimental
  Evidence from a Mandatory Activation Program,
  IZA DP no. 2504.
• Kildal, N. (2000), Workfare Tendencies in
  Scandinavian Welfare Policies, ILO.
• Grubb, D. (2005), Trends in Unemployment
  Insurance, Related Benefits and Active Labour
  Market Policies in Europe 10th Anniversary of EI
  seminar (www.kli.re.kr)
• Jean, S. (2006), The Labour Market Integration
  of Immigrants in OECD Countries,
  (www.oecd.org/document/47/0,2340,en_2649_37415_367
  21391_1_1_1_37415,00.html).
• Martin, J. and D. Grubb (2001), What works and
  for whom A review of OECD countriesexperiences
  with active labour market policies, Swedish
  Economic Policy Review 8, pp.9-56.
• OECD (2003), Benefits and Employment, Friend or
  Foe? Interactions Between Passive and Active
  Social Programmes, Employment Outlook, Paris.
• OECD (2005), Labour Market Programmes and
  Activation Strategies Evaluating the Impacts
  and Public Employment Services Managing
  Performance, Employment Outlook, Paris
• OECD (2006), Employment Outlook Boosting Jobs
  and Incomes, Paris.
• Thoren, K. (2005), Municipal activation policy
  A case study of the practical work with
  unemployed social assistance recipients, IFAU
  working paper 200520.