Active labor market Active labor market policiespolicies

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

What are we talking about?What are we talking about?

4 basic functions of ALMP

1. Raise output and welfare

2. Maintain size of the effective labor force

3. Reallocate labor between sub-markets

4. Alleviate moral hazard problem of unemployment insurance

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

What are we talking about? IIWhat are we talking about? II

4 main types of ALMP1. Training2. Subsidized employment: direct job creation,

wage subsidies3. Public employment services (PES): placement,

counseling and vocational guidance, job search courses

4. Activation: mandatory participation in 1-3 (workfare schemes) & benefit sanctions

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Overlaps with other Overlaps with other institutionsinstitutions

• Payroll taxes and in-work benefits

• Unemployment benefits

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

OutlineOutline

1. Measures and cross-country comparison

2. Theory

3. Empirical evidence

4. Policy issues

5. Why do active labor market policies exist?

6. Review questions

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

MeasuresMeasures

Often but not always expensive

• Number of workers participating

• Public expenditures (% of GDP)

• Sanction rates

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons

Cross-country comparisonCross-country comparison

Large cross-country differences• Share of labor force participating

– 1.2% (Czech Republic) – 7% (Belgium)

• Expenditures (% of GDP)– Training: 0.01 (Mexico) – 0.51 (Denmark)– Subsidized jobs: 0.01 (US-UK) – 0.4 (Belgium)– PES: 0.03 (Korea) – 0.38 (UK)

• Sanction rates (% of unemployment)– 0.4 (New Zealand) – 38.5 (Switzerland)

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons

Theory – UV curveTheory – UV curve

ALMP might affect functioning of a labor market

• UV curve = empirical relationship between unemployment and vacancies

• Improvement of the functioning inward shift of the UV curve

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory

v1

u2 u1

C A

BC1

Unemployment rate (%)

Vacancy rate (%)

BC2

Box 12.1 Beveridge curve and Box 12.1 Beveridge curve and matching functionmatching function

William Beveridge (1879-1963) established empirical relationship between U and V

• Theoretical background: matching of U and V flow of filled vacancies & flow of unemployed finding jobs

• m = A(U)1- V

• Steady state: flow = constant inverse relationship between U and V

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory

Theory – benefit sanctionsTheory – benefit sanctionsSearch-matching model• Sanctions: temporary reductions in benefits• Sanction system: monitoring & penalties• Ex post: reduction in benefits increases search intensity• Ex ante: risk of getting a benefit sanction increase

search intensity• Effect depends on monitoring intensity & size of the

penalty• Increase in search intensity reduces unemployment

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory

Empirical evidenceEmpirical evidence

Shifts in Beveridge curves – difficult to draw conclusions

Empirical studies

• Experimental: random allocation of workers to treatment group & control group

• Non-experimental: impose structure

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

Empirical evidence – Empirical evidence – experimental studiesexperimental studies

• Gorter and Kalb (1996): intensive counseling and monitoring (Netherlands)

• Dolton and O’Neill (1996, 2002): British Restart program

• Black et al. (2004): Employment services (Kentucky)

• Van den Berg and van der Klaauw (2006): counseling and monitoring (Netherlands)

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 StatesBox 12.2 ALMPs in the United StatesKlepinger, Johnson, and Joesch (2002)Klepinger, Johnson, and Joesch (2002)

Experiment in the Maryland• Assignment to control and treatment groups on

the basis of social security numbers• Control group: standard = 2 employer contacts

per week & report those contacts• 4 treatment groups:

1. 4 employer contacts per week2. No specified number of contacts3. Four-day job search workshop (4 hours/day)4. Claimed employer contacts would be verified

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 IIBox 12.2 ALMPs in the United States II Klepinger, Johnson, and Joesch (2002)Klepinger, Johnson, and Joesch (2002)

Control group

Additional contacts

No report

Work-shop

Verify contacts

UI benefits ($) 2085 – 116* 34 – 75* – 113*

Weeks of benefits 11.9 – 0.7* 0.4* – 0.6* – 0.9*

Exhausted benefits (%) 28.3 – 2.5* 1.5* – 1.1 – 2.8*

Percentage worked 80.0 1.1 0.8 – 0.8 1.3

Earnings ($) 8407 54 347* – 163 124

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

Box 12.3 ALMPs in the DenmarkBox 12.3 ALMPs in the DenmarkGraversen and Van Ours (2008)Graversen and Van Ours (2008)

• 2 regions in Denmark allocation of unemployed to treatment and control group on the basis of birth date

• Treatment group; after: – 1-2 weeks: letter with obligations– 5-6 weeks: job search program (2 weeks)– 4 months: activation program (3 months)– 6-7 months: make new job plan

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

Empirical evidence – Empirical evidence – non-experimental studiesnon-experimental studies

• Effects ALMP on job-finding rate rather small

• Disadvantage ALMP: locking-in effect

• Large effects of benefit sanction on job finding rate

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

Policy issue 1: Policy issue 1: Do we need public employment Do we need public employment services?services?• Quasi-market: local employment services –

“survival of the fittest”

• Profiling of unemployed workers – not better than random assignment

• Assistance in finding jobs: locating relevant vacancies & update skills through training programs

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Policy issues

Policy issue 2: Policy issue 2: Do we need activation policies?Do we need activation policies?

• Activation programs: participation is obligatory for benefit recipients

• Less attractive to be unemployed: increase outflow – reduce inflow

• Workfare programs: temporary jobs in exchange for unemployment benefits

• Sticks (sanctions) – carrots (wage subsidies)

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Policy issues

Why do active labor Why do active labor market policies exist?market policies exist?

• Unemployment benefits provide disincentives to find a job; traps:

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

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Policy issues

Review questionsReview questions1. Through what mechanisms do benefit

sanctions affect unemployment?2. How do intensive interviews with

employment counselors affect the behavior of unemployed workers?

3. Why would training be more effective in countries where unemployment benefits are high?

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.