“What works” among active labour market policies

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 didn’t 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 Denmark’s “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. 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. The limits of activation strategies

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), “L’effet de l’allocation unique dégressive sur la reprise d’emploi”, 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_36721391_1_1_1_37415,00.html). Martin, J. and D. Grubb (2001), “What works and for whom: A review of OECD countries’experiences 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 2005:20.