Labour market policies and institutions (Readings: Calmfors et al.)

1. Labour market policies and institutions(Readings: Calmfors et al.) • Labour market policies are divided into activeand passive. • Passive labour market policies: Financial support for the unemployed. • Unemployment benefits/insurance • Early retirement for labour market reasons. • Aims of active labour market policies (ALMP): • to reduce search time by improving the information that those who search for jobs and for workers have about each other. • To adapt the supply of labour power to demand.

2. To reduce unemployment • Adapting institutions, structures, legislation – the workings of the labour market • Labour market policies • Countercyclical policies (stimulating aggregate demand in downturns).

3. History: • In the late 19th century, workers and unions began to set up “mutual aid funds” to support those hit by illness or unemployment. The unemployment insurance funds received state support from 1935. • At the beginning of the 20th century, municipal Employment Offices (arbetsförmedlingar) were set up. In 1948 they were centralised and responsibility transferred to central government. • During the inter-war period, the state paid some unemployed workers for work in public projects – with lower pay than market wages.

4. After WWII: • How to get • Full employment • “Equal pay for equal work” • Favourable conditions for structural and technological change • without • High inflation • Poverty wages

5. A dilemma for economic policy: • With restrictive fiscal policies, some firms would not be able to hire workers/some workers would not be able to find jobs or only find them at very, very low wages. • With expansionary fiscal policies, there would be inflation and less competitiveness on the world market.

6. The Rehn-Meidner model • LO-economists Gösta Rehn and Rudolf Meidner proposed: • Restrictive fiscal policies • Solidaristic wage policies (“equal pay for equal work”) for equity reasons and to avoid compensatory wage demands. • Targeted measures for workers who had problems finding jobs – retraining, subsidies, public works. • Measures to encourage re-structuring – investment in industries with high productivity, mobility of workers.

7. ALMP was an earlier and larger part of Swedish policies than in other countries - and integrated with general economic policies. • In most OECD countries, ALMP have become more and more important – more in Western Europe than in US. (Sweden’s spending no longer exceptional.) • The unemployment crises of the 1990s led to a large increase in LMPs – the passive increased most but there was also a large expansion of ALMP.

9. There was a large increase in ALMP in all EU countries in the 1990s but an even larger of PLMP • Expenditure on passive LMPs increases almost automatically with the unemployment rate. • Therefore the ratio of ALMP/all LMP decreases in a recession. From 1989 to 2000 – across a business cycle- the increase was very small.

10. Active labour market policies – the statistical definition includes only those targeted on specific groups. • Other policy areas – education, income taxes, pay-roll taxes, infrastructure, monetary policies – of course have huge impact on labour market outcomes also. • Monitoring of recipients of insurance can be as important as how the insurance is constructed. (Work tests, obligation to take “suitable job”, checks for abuse etc.)

11. Types of ALMP • Public employment services: Information,coaching – and control. • Labour market training • Youth measures • Subsidised employment • Measures for the disabled

12. Effect of ALMP on the unemployed is not necessarily = effect on employment. • Displacement effects • Wage effects • 1. Effects on matching • 2. Effects on competition for jobs • 3. Effects on productivity of job seekers • 4. Effects on allocation of the work-force • 5. Displacement effects • 6. Accomodation effects on wage-setting

13. Measurement issues (cont.) • There are wider social effects besides employment and wages – (on drug abuse, physical and mental health, crime, motivation and self-confidence). • Problems of generalisation. The results from a small scale pilot project may be different from a large scale implementation. Also, different groups may be differently affected. • In comparison over time, over regions or municipalities or countries, ”reverse causality” is a problem.

14. Real wage LF Employment schedule Wage setting schedule Unemployment Regular employment

15. Effects on matching • Moreefficientmatching: • Firmscanfillvacanciesmorequickly and cheaply • Employmentscheduleshiftsto the right • Wagesettingscheduleshiftsto the right • Employment • Wage ?

16. Competion for jobs • ALMP may keep people in the LF. • May increase intensity of job search • May make the unemployed more attractive to employers. • More workers competing for jobs  more employment & higher wage • But there can be both more employment and more unemployment since LFP 

17. Effects on the productivity of job-seekers • MP of labour  labour demand   employment  & wages  • The employment schedule shifts to the right • But • More productive workers may have higher reservation wages • The wage setting schedule shifts upwards, counteracting the effects.

18. Effects on the allocation of labour • Assume: • There is a highproductivity (H) and a low-prod. sector (L). • The wagesettingschedule is steeper in H • If labour is transferred from L to H: • Supply in H so wH (a lot) • Supply in H so wL (less) • Net employmentincreases.

19. Displacement effects • Deadweight effect • Substitution effect • Displacement shifts demand curve for regular employment to the left

20. How to measure the results of ALMP? • Simple ”before and after” comparisons are not ”all else equal” – participants are selected and other events occur (like change in UE-rate). • ”Participants and non-participants before and after” controls for ”other events” but not for selection – unless participants are chosen in a randomised fashion. • Programmes can have different efficiency in the long and the short run – it makes a difference for how long the participants are followed. • There are direct and indirect (individual and macro) effects. (Displacement, wage formation).

21. Methods in studies • Difference in difference (in difference) • Experiments with randomised participation (mostly North American studies). • Panel data. • Selection correction. • Matching by individual characteristics. • Propensity score matching.

22. Employment services • International studies shows positive results of intensified support and coaching services by ES, and of bonuses, particularly if combined with monitoring/work tests. Helps most categories of unemployed.

23. Older Swedish studies • Eskilstuna experiment and studies from 70s-80s show some positive effect • Last decade • Programs targeted on newlyarrived immigrants and on long-term unemployedrelativelysuccesful • Experiments with different combinations of support and controlindicatedthatintensifiedemployment services wereincreasedtransitiontojobs

24. The high level of employment service activity in coaching makes it hard to measure effects (no control group…)

25. Labour market training • Most expensive ALMP • Efficiency depends very much on context: • Scale • Content – LM relevance and ”quality signal” • Motivation (not just to re-qualify for insurance). • Type of UE - works better against structural than cyclical unemployment. Which unemployed – US results better for women than for men, poor for ”disadvantaged youth”.

26. Sweden in 70s: positive effect on exit, but training also takes time… (Locking-in effect.) • Sweden in 90s: Much poorer effects. (Sometimes even negative.) • After 2000: Several studies show positive effects.

27. Why the difference? • Works better against structural than cyclical unemployment. • There were more jobs to train people for. • The massive increase in 1990s may have lowered quality • The ”70-percent target” from 1999 may have led to positive selection into programs. • Training programs could no longer be used to renew eligibility for u. i.

28. Training programs in a model with minimum wages • Assume: • There are two groups of workers, high skilled and low skilled. • Market clearing wages for high skilled. • A minimum wage which is not market clearing for low skilled  UE • If training changes some low skilled to high skilled there is an addition to production with no loss (since the low skilled were unemployed).

29. Subsidised employment • Subsidies for employers who hire unemployed persons. • Subsidised work in public or non-profit sector • Subsidies (and training) for unemployed who want to start their own enterprise • Recruitment subsidies

30. Subsidies to employers: • Fewer studies than for training programs. • In some studies locking-in-effects larger than treatment effect (search was more effficient). • Better effects the closer the program was to real jobs. • But that also increases displacement effects. • Results of subsidies for employing youth in 1990s weak, a lot of displacement. • Some have high displacement effects but a 50% displacement effect still means a 50% increase in employment. • Later studies (Forslund) found that subsidised employment increased transition to regular jobs (often with the same employer).

31. ”Activity garanties” • Targeted at long-term unemployed • Introduced 2000 with pay = u. i. • Changed form in 2006 - and to less compensation. • General, obligatory programs or targeted?

32. Measures for the disabled • Include • subsidies to employers in the ”open” labour market (”lönebidrag”, 1.3% of the LF). Combined with plans to phase out the subsidy. • Sheltered employment (Samhall). Some exit to regular LM (5%/year).