Active Labour Market Policies: Theory and Danish

Experiences

Torben M. Andersen Department of Economics and Business

Aarhus University

IZA/World Bank/OECD Conference on Activation and Employment Support Policies

Istanbul 2012

Active labour market policies/workfare (ALMP/WF):

• Generous social benefits – can incentive structure be maintained by ALMP?

• More acceptance of ALMP than benefit reductions?

• Work first: Target transfers to those working, but having low income (working poor)

• Easier to get support for a ”pro-active” social safety net

Activity/participation requirements as part of the eligibility conditions for transfers (unemployment benefits, social assistance)

Aims of ALMP • Targeting: Ensuring that transfers go to the intended

recipients (“deserving”) • Job-search incentives:

Strengthen incentives to search for regular jobs (job search intensity, and reservation demands/wages)

• Qualifications:

Address skill constraints/barriers (technical, cognitive, non-cognitive/social) lowering job finding chances

Targeting – the selection problem

• Target transfers to individual with low earnings ability • Unconditional transfers: Some high-ability individuals

may claim benefits • ALMP-conditions: Higher opportunity cost for individuals

with high earnings ability to claim transfers - high-ability types self-select not to claim transfers - transfers better targeted to the ”deserving” • Possible to implement higher transfers for given fiscal

costs

ALMP and labour supply

Extensive margin: • Transfers not a

”passive” alternative to work

• ALMP lowers the

reservation wage

• Higher labour force participation for given transfer and tax levels

Labour supply

Marginal effective tax rate on work

ALMP

ALMP and targeting • Workfare does not have to be productive (direct treatment

effect) to affect labour market outcomes! • It is a screening device! • Screening paradox:

– The target group for transfers is exposed to the ordeal of ALMP – The problem was the ”non-deserving” claiming the transfer – The mechanism works by making it unattractive for the non-target

group to claim the transfer!

• Welfare case for ALMP? – Higher transfers – Disutility from ALMP (less leisure time)

Job search

• Trade-off insurance vs incentives

• Generous benefits = insurance protection income/consumption

• Reduces incentives to search for jobs (search intensity, reservation demands to jobs)

Search and ALMP • Search

– Prior to participation: more search (threat/motivation effect)

– During participation: less search (locking-in)

• Wages – outside option is changed = wage moderation

• General equilibrium effects: search and

wages affect job-creation

ALMP and employment

• ALMP improves employment for given benefit levels

• (Utilitarian) Welfare may improve

• Optimal policy – small intensity (few) but demanding activity Replacement ratio

Workfare requirement

Qualifications

• Overcome barriers for job-finding – Individual characteristics and market

developments – Targeting problem (who and what?)

• Duration dependent loss of human capital

– Strengthens the incentive to search up-front – ALMP may be a carrot (will solve my problems)

• Ex post to participation – Improved qualifications – Changed reservation demands

Activation

Threat/motivation effect: Active job search/ lower reservation demands

Screening: Deserving vs non-deserving

Locking-in Less active job search

Improved qualifications

More narrow job search

General equilibrium effects via wage formation and job-creation

Unem

ployment spell

Programmes are costly time profile: stepping up

• How to avoid dead-weight losses?

• Programme assignment (profiling)

• Adminstration – incentives and monitoring

The Danish case: Low unemployment and extensive use of ALMP

0

2

4

6

8

10

12

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Denmark

OECD 0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

Denm

ark

Belg

ium

Net

herla

nds

Swed

enG

erm

any

Fran

ceFi

nlan

dIre

land

Spai

nAu

stria

Port

ugal

Pola

ndLu

xem

bour

gJa

pan

Hung

ary

Italy

Kore

aCa

nada

Slov

enia

Uni

ted

King

dom

Aust

ralia

Chile

Esto

nia

Czec

h Re

publ

icSl

ovak

Rep

ublic

Uni

ted

Stat

esIs

rael

Mex

ico

ALMP costs, % of GDP, 2009

Boom-Bust pattern: Larger GDP drop than OECD average

Unemployment

The three pillars of the Flexicurity-model

• Lax employment protection= flexibility for firms

• Generous unemployment

benefit scheme = insurance/ security for workers

but reduces incentives to be

actively searching for jobs • The model presumes that

unemployment is a temporary state

• Balanced via ALMP • :

Flexible hiring/firing rules

Unemployment Insurance Active labour

market policy

Labour market reforms in the 1990s

• Shorter duration of the benefit period

• Stricter eligibility conditions

• Activation (workfare) - Condition for eligibility - Not qualifying for UIB

Short term insurance

elements maintained, but incentives strengthened

Flexible hiring/firing rules

Unemployment Insurance Active labour

market policy

Replacement rate %

Activation requirements

M o n t h s h s

6 12 18 24 30 36 42 48 54 60 66 72

90

Unemployment benefits

Social assistance

Full time activation

Activation offer: right and duty

AcActiveaastive job se Active job search

Activation offer: right and duty

Active job search

Active job search

Low income groups

APW 60

NB duration period shortened to 2 years + stricter eligibility conditions

The Danish System: Unemployment insurance benefits, Social assistance and ALMP

The Danish labour market

• High level of job-turnover

• High incidence of short term unemployment

• ”Entry friendly” Relatively low level of long-term and youth unemployment

• High level of perceived

job security (=ability to find a job)

AUT

BEL CHE

CZE DEU

DNK ESP FIN

FRA GBR

GRC

HUN

IRL

ITA NOR

POL

PRT SVK

SVN

SWE

TUR

USA

10,0

15,0

20,0

25,0

30,0

35,0

10,0 15,0 20,0 25,0 30,0

Hirin

gs %

Separation %

Job creation and destruction

High incidence of unemployment but short

duration

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

Unemployment : Affected and full-time equivalents

Number of persons affected by unemployment

Full-time equivalents

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

0

5

10

15

20

25

Average duration - left scale

Affected relative to unemployment full-time equivalents-right scale

Average duration and ratio of affected relative to full-time equivalents

Quick transition out of unemployment – also in the

current crisis

0

20

40

60

80

100

120Survival rate unemployment

2006.4-2007.3

2009.4-2010.3

360.000 spells 520.000 spells

0

10

20

30

40

50

60

3 months 6 months 9 months 12.months

%

In employment after initiated unemployment spell

2009.4 - 246.000 initiatedspells

2006.1- 160.000 initiatedspells

Low level of long-term and youth unemployment

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

45,0

Switz

erla

ndN

ethe

rland

sAu

stria

Japa

nN

orw

ayG

erm

any

Aust

ralia

Denm

ark

Luxe

mbo

urg

Cana

daIc

elan

dO

ECD-

Tota

lN

ew Z

eala

ndU

nite

d St

ates

Uni

ted

King

dom

Finl

and

Port

ugal

Belg

ium

Fran

ceSw

eden

Italy

Irela

ndG

reec

eSp

ain

Youth unemployment rate, % of youth labour force (15-24)

0,0

10,0

20,0

30,0

40,0

50,0

60,0

New

Zea

land

Nor

way

Cana

daSw

eden

Aust

ralia

Denm

ark

Icel

and

Finl

and

Aust

riaN

ethe

rland

sU

nite

d St

ates

Luxe

mbo

urg

OEC

D-To

tal

Uni

ted

King

dom

Switz

erla

ndJa

pan

Fran

ceG

reec

eSp

ain

Ger

man

yIta

lyBe

lgiu

mIre

land

Port

ugal

%

Long-term unemployed, % of total unemployment

ALMP – requirements and activities

• Up-front job search requirement

• ALMP within first 9 months, different rules for the young

• Activation rate = 1/3 for unemployed

• Most programmes are short (< 13 weeks)

• Most in work related ALMP (intership, employed with wage subsidy)

• Continous change in requirements and contents – Business cycle situation – Evidence

• Recently much focus on interviews and monitoring of jobs search

• Increasing demands on the young – Youth package – earlier and

more demanding ALMP (=education)

– Immediate full-time activation for the very young

ALMP -administration • Specific institutional structure: Unemployment

insurance funds (Unions) and municipalities

• One-stop shop - Job-centres (municipalities): For all unemployed

(Social Assistance and Unemployment benefits) - Easier for the unemployed • Incentive structure for job-centres - Reimbursed based on quantitative measures. What

about quality? - Effect on job counselling (area vs skills) - More lean administration?

Requirements and programme assignment: Match-groups

• Group I (job-ready): No problems except unemployment.

• Group II (ready for activity): Not ready to start

working, but is capable of participating in a program activity aiming at later employment

• Group III(temporarily passive): Neither ready for a job nor for participation in a program activity aiming at later employment

The achilles heel: Long-term unemployment

• Extended welfare state critically dependent on maintaining a high employment rate!

• Financial crisis = increasing inflow into ALMP • How to maintain programme effectiveness?

• How to identify problems (different composition

of the pool of unemployed, structural shifts)? • Maintaining political support for ALMP when

unemployment is high?

Concluding remarks • ALMP has important effects on the incentive structure in

the labour market • Can be used to balance incentives with insurance

(distributional goals) • Programmes are costly – programme administration and

assignment are critical • Danish experience: - ALMPcan be used to support a flexible labour

market which is ”entry-friendly” - Continuous adaptation of policies to curb costs and

maintain effectiveness - It has coped reasonably with the crisis – implicit

work sharing - Can it prevent a significant increase in long term

unemployment?