Lecture May 28 – 2009 Active Labor Market Policies 1 Active Labor Market Policies: What are we talking about? What are we talking about? 4 basic functions of ALMP 4 main types of ALMP 1. Raise output and welfare 1. Training 2. Subsidized employment: direct job creation, wage 2. Maintain size of the effective labor force subsidies 3. Reallocate labor between sub-markets 3. Public employment services (PES): placement, counseling and vocational guidance, job search 4. Alleviate moral hazard problem of courses unemployment insurance 4. Activation: mandatory participation in 1-3 (workfare schemes) & benefit sanctions 3 4 Active Labor Market Policies Labor Public expenditures (% of GDP) Measures force (%) Total Training PES Job Other Sanction Often but not always expensive creation rates France 3.6 0.9 0.29 0.25 0.18 0.18 • Number of workers participating • Public expenditures (% of GDP) Germany 4.7 0.97 0.25 0.35 0.10 0.27 1.1 • Sanction rates Italy 0.54 0.20 0.08 0.01 0.25 Netherlands 4.2 1.33 0.13 0.49 0.18 0.53 36.0 Spain 0.78 0.17 0.13 0.09 0.39 5 UK 0.49 0.09 0.38 0.01 0.01 5.5 6 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory Empirical evidence Empirical evidence Vacancy rate (%) Shifts in Beveridge curves – difficult to draw C A conclusions v1 Empirical studies BC1 • Experimental: random allocation of workers BC 2 to treatment group & control group • Non-experimental: impose structure u u 2 1 Unemployment rate (%) 7 8 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence Empirical evidence – experimental studies Black et al. (2003) - Kentucky • Worker profiling 1–20 (sex, age, race, • Gorter and Kalb (1996): intensive ethnicity, veteran status may NOT be used) counseling and monitoring (Netherlands) • Dolton and O’Neill (1996, 2002): British • Long predicted spells: receive employment Restart program & training services early in the spell (WPRS) • Van den Berg and van der Klaauw (2006): • Randomization at the margin – depending on counseling and monitoring (Netherlands) available resources. • Large impact – after receiving letter • WPRS reduced moral hazard by acting as 9 “leisure tax” 10 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence Box 12.2 ALMPs in the United States Outcomes Klepinger, Johnson, and Joesch (2002) • 2.2 weeks reduction compared to control Experiment in the Maryland group • Assignment to control and treatment groups on • Reduction in mean benefits payment of $143 the basis of social security numbers • 2 control groups: 2 employer contacts per week • Higher earnings in the year after the start of & report those contacts (Hawthorne effect) the UI claim (earlier back to work – not • 4 treatment groups: higher wages conditional on employment) 1. 4 employer contacts per week • Largely early exits – threat effect 2. No specified number of contacts 3. Four-day job search workshop (4 hours/day) 4. Claimed employer contacts would be verified 11 12 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence Empirical evidence Box 12.2 ALMPs in the United States II Box 12.3 ALMPs in the Denmark Klepinger, Johnson, and Joesch (2002) Graversen and Van Ours (2008) • 2 regions in Denmark allocation of unemployed Control Additional No Work- Verify group contacts report shop contacts to treatment and control group on the basis of birth date UI benefits ($) 2085 – 116* 34 – 75* – 113* • Treatment group; after: Weeks of benefits 11.9 – 0.7* 0.4* – 0.6* – 0.9* – 1-2 weeks: letter with obligations Exhausted benefits (%) 28.3 – 2.5* 1.5* – 1.1 – 2.8* – 5-6 weeks: job search program (2 weeks) Percentage worked 80.0 1.1 0.8 – 0.8 1.3 – 4 months: activation program (3 months) Earnings ($) 8407 54 347* – 163 124 – 6-7 months: make new job plan • In between: frequent contacts with case workers 13 14 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Exit rates to job search programs Exit rates to training programs 0,16 0,07 0,15 0,14 0,06 0,13 0,12 0,05 s 0,11 s m a m r a g 0,1 r o g r o p r p h 0,09 0,04 c g r n a i e 0,08 n i s a b r t o j 0,07 o t o 0,03 t e t e t 0,06 a r a r t i t i x x 0,05 E E 0,02 0,04 0,03 0,02 0,01 0,01 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 Weeks of unemployment Weeks of unemployment Treatment group Control group 15 Treatment group Control group 16 Empirical evidence Weekly job finding rates 0,09 0,08 0,07 0,06 t n 0,05 e m y o l p 0,04 m e o t 0,03 e t a r t i x 0,02 E 0,01 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 -0,01 -0,02 Weeks of unemployment 17 18 Treatment group Control group Difference Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence Empirical evidence – Results non-experimental studies • Job finding rate increases with 30% • Median unemployment duration from 14 • Effects ALMP on job-finding rate rather weeks to 11.5 weeks small • Why does the program work? • Disadvantage ALMP: locking-in effect • Carrot = help provided to the workers • Large effects of benefit sanction on job finding rate • Stick = threat effect - “tax on leisure” • Follow-up study: distance matters 19 20 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Policy issue 1: Do we need public Policy issue 2: Do we need employment services? activation policies? • Quasi-market: local employment services – • Activation programs: participation is “survival of the fittest” obligatory for benefit recipients • Profiling of unemployed workers – not better • Less attractive to be unemployed: increase than random assignment outflow – reduce inflow • Assistance in finding jobs: locating relevant • Workfare programs: temporary jobs in vacancies & update skills through training exchange for unemployment benefits programs • Sticks (sanctions) – carrots (wage subsidies) 21 22 Why do active labor market policies exist? Unemployment benefits – disincentives to find job: 1. Unemployment trap: relatively high benefits discourage job search and put upward pressure on wages 2. Inactivity trap: same trap without unemployment benefits; income-related benefits may be lost upon taking paid work 3. Poverty trap – low-wage trap: in low-paid work insufficient incentives to increase working hours or move to higher paid job – income-tested benefits 23 .