Structure of Lecture

1. Active Labor Market Policies:An Introduction into their Rationale and Evaluation(with an emphasis on transition countries)Hartmut Lehmann (University of Bologna and IZA)Forlì – politica economica 2014-2015

2. Structure of Lecture • Active Labor Market Policies (ALMP): types of programs, scope, their rationale in OECD countries and issue of applicability to transition countries; • ALMP in Macedonia: A cautionary note; • A brief history of the evaluation of ALMP in transition countries: • Macroeconometric studies; • Microeconometric studies; • Case of random social experiments: pros and cons

3. Structure of Lecture, cont. Country studies: • A randomizedsocialexperiment in Hungary (Micklewrightand Nagy 2005); • The publicworksprogram in SloveniaandtheHeckmancorrection model (Vodopivec 1999); • ALMP in Polandandexactmatchingmodels (Kluve, Lehmann and Schmidt 2008); • The “BeautifulSerbia“ programandpropensity score matching (Boninand Rinne 2007); • Lock-in effectsofSlovaksubsidizedjobs: a naturalexperiment (van Ours 2004) . • Economic Impacts of Professional Training in the Informal Sector: The Case ofthe Labor Force Training Program in Côte d‘Ivoire (VernerandVerner 2005)

4. What do we mean by ALMP here? • We use narrow definition: • ALMP are policies directed at the unemployed or those workers threatened by redundancies.

5. ALMP in OECD: archetypical programs and generic purpose

6. Scope of ALMP: expenditures in EU-15 states Figure 2:

7. Scope of ALMP: expenditures in new EU states Figure 1:

8. ALMP in OECD countries– micro aspects • ALMP in mature OECD countries like b, c,d and e seek to integrate marginal social groups or to re-integrate marginalized groups into the labor market. • large majority of the labor force are continuously employed, but certain groups with relatively loose labor market attachment and/or very low human capital experience great difficulties in finding permanent employment • ALMP can increase the human capital of such "marginal" persons and can strengthen their labor market attachment thus boosting the probability of employment or re-employment. • ALMP is also meant to fight poverty by increasing productivity of workers and boost their wage income.

9. ALMP in OECD countries – macro aspects • ALMP aremeanttoincreaselabordemand in timesofrecessions (purposeisobviousand trivial, effect on overallunemploymentcanbequitecomplex, though – seeCalmfors (1994). • Also, ALMP aremeantto “cheatthe Phillips curve“, i.e. tolowerthetrade-off betweenunemploymentandinflation. • Bailey and Tobin (1977): in timesofclosetofullemployment, conventionalKeynesianaggregatedemandmanagementpolicies will only push upinflationifthosewhoareunemployedarehardtoemploy (becauseoflacking human capitaland/orlooselabormarketattachment). • Recipe: providetrainingorselectedpublicemploymenttothosedifficulttoemploysincethesepersons will not contributetoinflationarypressures, i.e. thesepersons find themselves on flatter “Phillips curves“ thanworkerswithhigh human capitaland strong labormarketattachment.

10. ALMP in OECD countries, “business cycle perspective” Integration or re-integration of "problem persons"  effective labor supply, ceteris paribus equilibrium wage   employment; Relates also to persons who have lost their job because of structural shocks or a deep recession (long-term unemployed). ALMP which successfully increase the effective labor supply, during the expansionary phase of the business cycle, can contribute to the dampening of inflationary pressures and/or help in the solution of partial hysteresis of unemployment due to long-term unemployment.

11. ALMP and unemployment hysteresis

12. General questions asked when evaluating ALMP measures • Did the ALMP measure lower the overall unemployment rate? • Did the schemes target the groups identified as those having problems leaving unemployment? • Did participation in a scheme enhance individuals' productivity, expressed in higher wages? • Did the measure increase the average re-employment probability of participants? • Have distortive effects, e.g. substitution - dead weight- displacement of output- and fiscal substitution effects, been minimized?

13. Applicability of ALMP measures developed in another context to transition countries Reiterating the main principles of ALMP in OECD countries • Historically, ALMP in mature OECD countries like b, c,d and e seek to integrate marginal social groups or to re-integrate marginalized groups into the labor market. • The large majority of the labor force are continuously employed.

14. Applicability of ALMP to transition countries Labor markets in transition economies are in general characterized by: • a low demand for labor • a stagnant unemployment pool • rising long-term unemployment • tougher competition for jobs among the unemployed than in most mature OECD countries • Strong labor market attachment of a significant component of the unemployed (and even of the long-term unemployed) • Large stock of accumulated human capital among the unemployed (and even the long-term unemployed) N.B. These stylized facts certainly given in first ten years of transition and relevant in Balkan economies even today.

15. Applicability of ALMP to transition countries – example training • Unemployed in CEE countries have potential for adapting relatively quickly to new tasks. They may, therefore, be the typical target group for measures like further training and retraining. • However, targeting the “standard” target groups (unskilled, low-educated, older workers, etc.) for further training and retraining might not be efficient – see stylized facts. • In actual fact, in most transition countries we observe “creaming effects.”

16. ALMP and regional mismatch in transition ALMP measures like b, c, and d are means of reducing mismatch by skill but also by region. • Taking the workers to the work: FOCUS: helping the unemployed move to regions with better employment opportunities. • Further training and retraining schemes • direct interventions by governments (e.g. subsidizing public housing in high opportunity regions; government contributions to moving expenses.)

17. ALMP and regional mismatch in transition, cont. 2."bringing work to the workers", FOCUS: creating jobs in high unemployment regions. • investment grants or subsidies to firms if they locate or undertake new capital investment in such regions. In transition countries both strands of regional policies are problematic because: • High barriers to worker mobility • Investment policies are prohibitively expensive (especially as most governments in transition economies have budgetary problems)

18. ALMP in a transition country:Polish ALMP measures in some detail

19. Polish ALMP measures that we look at • Public Works; • Intervention Works; • Further training and re-training; • Start-up loans.

20. Public Works Local authorities employ those with uninterrupted unemployment spells of more than six months on public projects. Purpose of projects: • expand or maintain the public infrastructure ( latter more common); • environmental protection or amelioration. The duration of these jobs cannot exceed six months and it is the expressed intention of the government to rotate them among the long-term unemployed. People employed on public works might receive wages that are above the minimum wage.

21. Intervention Works (wage/job subsidies) Firms (private or state-owned) can approach the local employment council and ask for subsidized additional work places. In order to qualify for this scheme the firm has to have more than 10 employees and must not have released more than 10 percent of its workforce in the last six months. Subsidized employment is not to exceed six months. The state pays a wage subsidy to the firm equal to the level of benefits and often firms or local employment councils pay additional wages to these workers.

22. Intervention works, aims Intervention works have two aims. • by hiring an unemployed person on a subsidized job he or she can enhance or regain human capital that might enable him or her to subsequently enter a regular job. 2. entrepreneurs can learn about the productivity of a worker without paying him or her a full wage.

23. Intervention works, structure of incentives • Incentives to the firm are structured in such a way that ensures the longest possible employment relationship. The longer a previously unemployed worker is kept in an intervention works slot the higher the cumulative subsidy going to the firm will be. • Workers have an incentive to hold on to such a subsidized job for at least 6 months as, in the 1990s at least, an employment relationship of this length entitled workers to another round of 12 months benefit receipt.

24. Further training and re-training Private and public agencies are paid a fee to train some of the unemployed who in turn are paid an allowance (115 percent of benefits) while on the course. Main objectives: solve skill mismatch and augment human capital. By increasing the human capital of the unemployed in skills that employers in the expanding sectors want, the chances of the unemployed to enter a regular job are meant to increase and bottlenecks in the supply of certain skilled workers are meant to be eliminated.

25. Start-up Loans: set-up Subsidies (in the form of credits) to the unemployed given by LLOs to start-up their own businesses. If after 24 months of founding a business it is still operative, 50 percent of the loan will be written off. Employment offices seem to examine applicants well as many of the started businesses presumably survive for more than two years.

26. Start-up Loans: small displacement of output effects • Most of the started businesses are in the services sector which at least in the first ten years of transition was underdeveloped in Poland.  • Displacement of output effects which, e.g. in the case of the British Enterprise Allowance Scheme, were estimated to be approximately 50 percent should, therefore, be relatively small.

27. Evaluation of ALMP:Why is it important to have outside researchers evaluate ALMP?

28. What do we mean by evaluation • Evaluation does not mean an evaluation of the adminstrative process connected to the implementation of the ALMP measure. • Evaluation means that we want to know whether the ALMP measure has improved labor market prospects at the macro but also at the individual level. • Pitfalls (2 examples): • Number of participants is not a measure of efficacy; • Before- after comparisons are not a reliable measure of success of a program.

29. Evaluation of ALMP:- Macroeconometric approach- Microeconometric approach

30. Macroeconometric evaluation of ALMP • Flow analysis of administrative macro data - aim: establish the overall effect of an ALMP measure on outflows from unemployment to employment (sensible when measure is “large”). • Potential strong point of such an approach: take account of dead weight loss and substitution effects. • Link to general equilibrium analysis of the effects of ALMP on the natural rate of unemployment or on the NAIRU (non-accelerating inflation rate of unemployment)

31. Determination of employment and the NAIRU – theoretical underpinnings of evaluation

32. Determination of employment and the NAIRU • Employment schedule downward sloping (like labor demand curve); • Wage setting schedule: higher aggregate employment causes pressure for higher real wages – reasons: • In framework of trade union models; • In framework of efficiency wage models.

33. Determination of employment and the NAIRU: model extension with ALMP

34. Determination of employment and the NAIRU: model extension with ALMP • On horizontal axis now: regular employment ; • Open unemployment, u0, and program participation, r0, make up that fraction of the labor force not regularly employed; •  participants in ALMP shifts RR-curve to the left and fraction of program participants is increased by r; • Open unemployment is reduced to u1; • This is gross effect of program expansion; • To get to net effect, we need to account for indirect effects via shifts of WS and RES.

35. Effects of ALMP expansion on WS and RES:

36. Effects of ALMP expansion on WS and RES:Matching effects • ALMP expansion improves matching efficieny via three channels: • Attenuating mismatch (retraining and further training); • Promotion of active search behavior of unemployed (e.g., Restart program in Britain); • Working in labor market program substitutes for regular employment (solves asymmetry of information). • Positive effects: shifting to the right of RES and of WS (from A to B): regular employment expands for sure, effect on real wage ambigous.

37. Effects of ALMP expansion on WS and RES:Matching effects • Negative effects: lock-in effects during program participation and ex ante effects of reduced search behavior (especially if program has high value); • Micro studies that compare, e.g., employment rates of treated and controls might have an upward bias of treatment effect because controls reduce active search behavior before program starts (wait to participate). • Net effect: positive effects minus negative effects.

38. Effects of ALMP expansion on WS and RES:competition effects for insiders • Policies targeted at outsiders (like the long-term unemployed) might raise the competitiveness of these unemployed relative to insiders; • This results in downward wage pressure, i.e. WS shifts down and new equilibrium is at D  regular employment rises as real wages go down; • Job search assistance programs (like Restart) generate the fastest competition effects.

39. Effects of ALMP expansion on WS and RES:dead weight (DW) and substitution effects • Definitions of DW and substitution effects: • DW: hirings from target group that would have occurred in absence of program; • Substitution: jobs created for certain category replace jobs of other categories because of changes in the relative wage structure. • Both effects shown by a leftward shift of RES (at given real wage regular employment declines): new eqilibrium at C  regular employment and real wages decline.

40. Effects of ALMP expansion on WS and RES:dead weight (DW) and substitution effects • Most relavant in private sector employment incentive schemes; • Also given in the public sector, though where we can have fiscal displacement (Example: municipality holds back on hiring two janitors, hires instead two subsidized unemployed, this frees money for hiring a police officer).

41. Effects of ALMP expansion on WS and RES:other effects • Reduced welfare losses and reduction in wage constraints: equilibrium moves from A to E; • Productivity effects: two scenarios possible: (a) RES shifts up with equilibrium at F (b) RES and WS shift up with equilibrium at G.

42. Macroeconometric Evaluation

43. Relating the unemployment rate to outflows • Bydefinitionwegettheidentity: • In thesteadystate (wecandropsubscripts) thisbecomestheequation: • In Britain, e.g., Pissarides (1985) findsthat I arerelativelyconstantandtheriseof U over time iscausedby a fall in o; • In transition countries - againstpredictions – I are not particularly large, o areparticularlysmall (relative to OECD countries).

44. Macroeconometric evaluation of ALMP • Flow analysis of administrative macro data - aim: establish the overall effect of an ALMP measure on outflows from unemployment to employment (sensible when measure is “large”). • Potential strong point of such an approach: take account of dead weight loss and substitution effects.

45. Macroeconometric evaluation of ALMP • Heuristic model: where O=outflows from U;x1=variables controlling for the state of the labor market; x2= ALMP measures. Working horse of this model: “augmented” matching function; Data in industrialized countries: quarterly time series at national level (if stationary, little problems regarding estimation); Haskel and Pissarides (1988), Layard et al. (1991), Lehmann (1993), Dauth et al. (2010).

46. Macroeconometric approach, cont. “Augmented” Matching Function The "working horse" giving economic content to models of outflows from unemployment to employment is the matching function where in its simplest form unemployed job searchers are matched with vacant jobs. In this context ALMP can be thought of as measures which facilitate this matching process. When ALMP are added to the stock of unemployment and vacancies as factors potentially determining job matching we speak of an "augmented" matching function. The following briefly motivates one theoretical derivation of an estimable "augmented" matching function.

47. Macroeconometric approach, cont.

48. Macroeconometric approach, cont. • with and (2) •  is the search effectiveness index, c is an index of search effectiveness in absence of search-enhancing labor market schemes, and M is the weighted sum of the search-enhancing employment measures E. • One way to think about search effectiveness is to relate it to the duration of unemployment: the longer the duration the lower the search effectiveness because of actual lack of productivity or because of perceived (by employers) lack of productivity on the part of the unemployed (e.g., lack or loss of human capital). • ALMP are a means to boost this search effectiveness.

49. Macroeconometric approach, cont. • Log-linearizing equation (1) and adding a constant term we get • Ln (U)=ln  + ln U. But ln  = ln [c(1+M)]. We know that, for small values of x, ln (1+x) x.  For small values of αM the equation becomes • Notimposing the samecoefficient on lnU and lnc, addingseasonaldummmies and a time trend plus anerrorterm, wegetanestimablefunction:

50. Instrumenting ALMP • Nice exampleofinstrumenting ALMP: Boeri (1997) whousesexpenditurelevelsof ALMP assignedatthebeginningoftheyearas an instrument on theactualexpenditure. • Intuitive ideaisthatwhileassignedlevelsarehighlycorrelatedwiththeactualexpenditures on ALMP, theyare not correlatedwithunforeseenshocksthataffectoutflowsfromunemplyoment. • Mathematically, let Z betheinstrument, then E(Z,ALMP)0 but E(Z,)=0. In the bivariate casethe OLS andthe IV estimatorsare: