The implementation of ALMP carries the risk of indirect, external effects so it is very important to evaluate active programmes from the macroeconomic perspective, that is estimate their impact on aggregate unemployment and employment levels.9
9 Macroeconometric analyses usually consist in estimating the following equation (see Boone van Ours, 2004):
uit = β0 + β1 xit + β2 yit + β3 Δ2 pit + εit, where: uit – unemployment (employment) rate in country i in time t; xit – vector of labour market institutions ; yit – ALMP expenditure; Δ2 pit – change in inflation rate; εit – error term.
The estimation of the above equation permits to assess the direction and strength of impact of ALMP expenditure on employment and unemployment rates, controlling for the operation of other factors, e.g. structure of labour market institutions and economic cycle phase (approximated by inflation). Unfortunately, estimations of the above equation give rise to the problem of endogeneity. ALMP may affect the unemployment rate but the causation may be reverse– rising unemployment levels may induce greater ALMP expenditure. This is the reason why this variable is usually used in its normalised form (ALMP expenditure per unemployed as a share of GDP per working-age person). However, normalisation is not a remedy for the endogeneity problem if growing unemployment leads to a disproportionate increase in resources devoted to ALMP (i.e. when unemployment growth is accompanied by falling ALMP expenses per unemployed). Ignoring this problem leads to inaccurate estimates of the impact of ALMP on unemployment (employment) levels.
Table IV.3.
Macroeconometric studies on ALMP effectiveness
Study Sample Impact of ALMP on unemployment Impact of ALMP on employment
Scarpetta (1996) 15/17 OECD countries in 1983-1993 (-) (+)
Nickell i Layard (1999) 20 OECD countries in 1983-1994 (-) (0)
Estevao (2003) 15 OECD countries in 1985-2000
(+) subsidies, measures for the disabled
(0) trainings
(-) job-search assistance, youth measures
Boone i Van Ours
(2004) 20 OECD countries in 1985-1999 (-) labour market training, job-search assistance (0) other
(+) labour market training (0) other Bassanini i Duval (2006) 20 OECD countries in 1985-2002 (-) labour market training
(0) other
(+) labour market training (0) other
(+) – positive impact, (-) – negative impact, (0) – no impact
Source: Own elaboration
Scarpetta (1996) demonstrates that increase of the expenditure on ALMP decreases significantly the unemployment rate.10 However,
he also suggests that ALMP are associated with strong substitution and displacement effects. At the same time, due to the fact that active policies bolster labour supply, their impact on aggregate employment is positive though relatively marginal. Research carried out by Nickell and Layard (1999) confirms the conclusion that although increased expenditure on active labour market policies is a mighty factor when it comes to unemployment reduction (especially long-term unemployment), it does not exert significant influence on employment levels.
Estevao (2003) claims that the implementation of ALMP may favour employment rate – in 1993-2000, an increase of 1 percentage point in ALMP expenditure brought employment growth of 1.9 percentage points. Estevao studies the effectiveness of various types of ALMP and concludes that the supported employment and measures for the disabled have a positive effect on employment: whereas – surprisingly enough – greater expenditure on employment service and youth measures would bring the employment rate down. Boone and Van Ours (2004), in turn, showed that it is only expenditure on labour market training that significantly and considerably reduce unemployment and bolster employment – especially among women. They also looked at interactions between ALMP and unemployment benefits which led them to the conclusion that the positive (negative) impact of trainings on employment (unemploy- ment) is stronger in countries with more generous benefit systems.
Results of Bassanini and Duval (2006) also suggests that higher expenditure on ALMP does not automatically lead to employment growth and that a lot depends on the structure of implemented policies. Similarly to Boone and van Ours (2004), Bassanini and Duval point to the positive effects of training programmes. They estimate that if an average OECD country increased its expenditure on trainings (calculated per unemployed person as a percentage of GDP per capita) by 1 percentage point, it would be able to lower the general unemployment level by at least 0.05 percentage points. As for other ALMP categories, their impact is insignificant or even adverse.
The scope and structure of ALMP – together with a wide range of other institutions – may also influence the speed of adjustment of the unemployment rate to a new equilibrium in reaction to shocks emerging in the economy (e.g. falling productivity growth, deteriorating terms of trade, growing real interest rates). Blanchard and Wolfers (2000) look at interactions between macroeconomic shocks and ALMP expenditure based on a sample of 20 OECD countries in 1960-1995. They conclude that higher ALMP expenditure reduces the rise and persistence of unemployment following the negative shock. Similar conclusions were put forward by Bassanini and Duval (2006). Hence, although it seems that ALMP do not lead to significant employment growth, they render the labour market more flexible – they facilitate the absorption of negative shocks in the economy and limit the extent of their adverse impact. This is so because ALMP:
10 He suggests at the same time that the impact of ALMP on employment levels is a better indicator of their effectiveness. Since ALMP participants are often not classified in the statistics as unemployed, increasing the expenditure on active policies and number of their participants leads automatically to the fall in registered unemployment levels. However, this does not necessarily mean improvement in the labour market conditions.
•
strengthen the bargaining position of “outsiders” (e.g. long-term unemployed, youth) in wage negotiations, which facilitates wage adjustments after occurrence of a shock;•
help to adapt the skills the unemployed to the changing requirements of employers (e.g. trainings) and lower the cost of job-search (e.g. job broking);•
prevent those who lose jobs following the negative shock from withdrawal from the labour force.To sum up, macroeconometric analyses support the thesis that ALMP do not constitute a panacea for labour market problems but to some extent they can contribute to aggregate employment growth. What is more, it can be concluded that microeconometric studies overestimate the effectiveness of policies which bring adverse indirect effects (e.g. subsidized employment) and underestimate those which produce positive results only in a longer period of time (e.g. trainings).
Available analyses indicate that trainings and job search assistance have the potential to speed up the return of the unemployed to work and to increase employment levels, whereas other active measures seem to be ineffective. International experience also suggests that ALMP should not be directed to broadly defined target groups (e.g. to all young or elderly people) because employment prospects of members of such groups are usually largely heterogeneous. It seems that the best solution would be to profile the unemployed – to early identify individuals at high risk of long-term unemployment and social exclusion and to offer them personalised assistance. It can also be concluded that although the impact of ALMP on aggregate employment rate is rather modest, it is beyond doubt that active policies increase flexibility of the labour market – they facilitate adjustments in the economy, prevent discouragement and inactivity and reduce the level of long-term unemployment.