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Successes and Failures of Labor Market Policy in Europe

Jochen Kluve(RWI Essen, Germany)

Colombia Employment and Development Conference

Bogotá, November 14, 2008

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Introduction

Majority of countries worldwide has implemented certain labor market policies: unemployment benefits, training for the unemployed, etc

While labor markets are heterogeneous by country, these policies are similar, and their general objective is the same: increase employment, reduce unemployment

Important for countries to learn from each other’s experience

Europe: many different countries within relatively small space, many experiences with different labor policies

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Today‘s presentation

European labor markets: Unemployment and policy spending

Passive and Active Labor Market Policy

Knowledge on ALMP effectiveness

Types of countries

Systematizing the evidence: Meta-analysis

Failures and successes

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Unemployment in Europe

Source: Eurostat

0

2

4

6

8

10

12

14

16

EU (25)

EU (15)

Austria

Belgium

Czech

Rep

ublic

Denmark

Finlan

d

France

German

y

Hunga

ry

Irelan

dIta

ly

Netherl

ands

Poland

Portug

al

Spain

Sweden

United

King

dom

Japa

n

Norway

United

Stat

es

in % 2006

2007

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Youth unemployment in Europe

Source: Eurostat

0

5

10

15

20

25

30

35

EU (25)

EU (15)

Austria

Belgium

Czech

Rep

ublic

Denmark

Finlan

d

France

German

y

Hunga

ry

Irelan

dIta

ly

Netherl

ands

Poland

Portug

al

Spain

Sweden

United

King

dom

Japa

n

Norway

United

Stat

es

in %

2006

2007

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Long-term unemployment in Europe

Source: Eurostat

0

2

4

6

8

10

12

EU (25)

EU (15)

Austria

Belgium

Czech

Rep

ublic

Denmark

Finlan

d

France

German

y

Hunga

ry

Irelan

dIta

ly

Netherl

ands

Poland

Portug

al

Spain

Sweden

United

King

dom

Japa

n

Norway

United

Stat

es

in % 2005

2006

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European labor markets: overview

Unemployment in 2005:

EU-15: 8.0% 14 Mio., of which 4.7 Mio. LTUEU-27: 8.9% 19.3 Mio., of which 7.9 Mio. LTU

Spending (2003):

EU-15: 65 Bio. Euros on active labor market policy = .75% of GDP25 Bio. Euros on training programs

126 Bio. Euros on passive labor market policy

(Eurostat)

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“Passive” labor market policy

“Out-of-work income maintenance and support”, i.e. unemployment benefits and unemployment assistance

Early retirement schemes

Administration of the Public Employment Services (PES)

”Administering unemployment”

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Types of Active Labor Market Programs

1. (Labor market ) training: human capital accumulation

2. Private sector incentive programs: employer and worker behavior

3. Direct employment in public sector: public job creation

4. Services and Sanctions: job search efficiency

5. Youth programs

6. Measures for the disabled

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EU spending by program type

0

0,05

0,1

0,15

0,2

0,25

0,3

Total LMPservices

Training Job rotationand jobsharing

Employmentincentives

Integration ofthe disabled

Direct jobcreation

Start-upincentives

Source: Eurostat

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Knowledge on ALMP effectivenessFor a particular country:

Labor market policy Types of Active Labor Market Programs Design of the unemployment insurance system (passive support) Interaction of the active and passive systems (sanctions, “rights

and duties”)

Evaluation practice Data collection Academic and government-sponsored research Policy interest in learning about program effectiveness

[Countries are heterogeneous systematize information]

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Northern Europe

Western Europe

Southern Europe

Eastern Europe

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“Northern Europe”

Labor market policy Comprehensive use of Active Labor

Market Programs (Sweden: since the 1970s) Generous unemployment insurance

system (Denmark: 90% replacement rate) Program participation ultimately

compulsory for the LTU

Evaluation practice Comprehensive data collection (administrative) Multitude of academic evaluation studies Changes in policy? To some extent

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“Western Europe”

Labor market policy Less comprehensive use of

Active Labor Market Programs, but still substantial spending

Fairly generous unemployment insurance system Many countries (e.g. Germany, Netherlands, UK) have

introduced sanction elements over the last decade

Evaluation practice Less established, mostly triggered by EU, in some countries

rapidly evolving (Germany) Increasing number of academic evaluation studies Changes in policy? Unclear

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“Southern Europe”

Labor market policy Little use of Active Labor Market Programs, often regionally

focused Less generous unemployment insurance system

Evaluation practice Program evaluation rather uncommon Some academic evaluation studies exist Little is known on ALMP effectiveness

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“Eastern Europe”

Labor market policy After breakdown of Communist regimes, systems of active and

passive support built from scratch, often copying Western systems Little use of Active Labor Market Programs in most countries, some

exceptions are Romania and Poland (in the 1990s) Unemployment insurance

system offers basic support

Evaluation practice Program evaluation rather uncommon Some academic evaluation studies exist Little is known on ALMP effectiveness

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Spending on ALMP in Europe (%GDP)

00,20,40,60,8

11,21,41,61,8

2

Sweden

Denmark

German

y

Netherl

ands

Spain Ita

ly

Czech

Rep

ublic

Hunga

ry

2004

2005

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How to systematize the evidence Meta-Analysis: Collect evaluations of Active Labor Market

Programs from all over Europe (following certain requirements) 137 studies

For each study: Does the evaluation find a positive, negative, or zero effect of the program (on employment)?

[75 +, 33 Ø, 29 –]

Then analyze if there is a systematic pattern by program type: 1. Training (70)2. Private sector incentive programs (23)3. Public sector job creation (26)4. Services and Sanctions (21)5. Youth programs (35)

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Other factors that may influence effectiveness

For each country:

Labor market institutions Gross replacement rate Regulation on dismissal protection Regulation on fixed-term contracts Regulation on temporary work (OECD indexes)

Economic context Unemployment rate ALMP expenditure as % of GDP GDP growth

Study design (method, sample size)

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Results: ALMP effectiveness in Europe

Picture emerging from analysis surprisingly clear-cut:

Little systematic relation between program effectiveness and contextual factors

Exception: restrictive dismissal regulations

Instead: the program type matters

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Failures? Direct job creation in the public sector very rarely has a positive

effect on participants’ employment probability. Quite the opposite: effects are frequently negative.

Training programs have mixed effects, but generally tend towards positive impacts (see “successes” next slide), though maybe not as clearly / strongly as one might have hoped for.

Young people seem to be particularly hard to assist. Indeed, most youth programs fail. Perhaps ALMP is not the right type of policy for this group Preventive measures.

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Successes? Training programs are modestly effective on average. There is

some indication that impacts materialize in the longer run (human capital accumulation).

Private sector incentive schemes such as wage subsidies and start-up grants generally show positive effects. Caveat: Not much is known about substitution or displacement effects and deadweight loss.

“Services and Sanctions” seem particularly successful: Apparently many unemployed can be helped with basic job search assistance measures. Also, sanction elements mobilize the unemployed. These measures are also likely cost-effective.