Paltamo Full Employment Experiment: An Application of the Synthetic Control Method Kosti Takala∗ February 26, 2015 Abstract In this paper I study the effects of the Paltamo Full Employment Experiment, an activation measure for the unemployed which combines their prior unemployment benefits and a bonus into a salary. Thus, the unemployed have to work for their benefits unless they are willing to go on social assistance. To estimate the effects on unemployment and on the related benefits and allowances, I employ the synthetic control method to construct counterfactuals for Paltamo, a Finnish municipality in which the experiment was run from 2009 to 2013. I find that there was a real and statistically significant drop in unemployment and related benefits that lasted throughout the experiment. However, the experiment ended up costing more to the government than what could be retrieved through savings in benefit payments. Keywords: Labor market experiment, Unemployment, Synthetic control method ∗Department of Economics, Massachusetts Institute of Technology,
[email protected] 1 1 INTRODUCTION 2 1 Introduction The ever aging Finnish population means more dependents (children and pensioners, but mostly pensioners) and, therefore, more allowances, benefits and pensions to cover by the efforts of a stagnating labor force. Add to the equation a high unemployment, especially in the long term, and its related (generous) benefits and health problems, and you get a government deficit tantamount to a house of cards waiting to collapse, unless something can be done to the different costs stemming from unemployment. To tackle the above problem, many countries have implemented measures such as active labor market policies, the scale and evaluation of which has been inadequate.