Efficiency of Employment Subsidies and Firms' Recruitment Strategies

0&; ~()OS R.A.M.H.M. Welters. Maastricht.

/\11 ngh1.s re~crvecl. No part of this publication may be reprodut~cd. sLOred in a ret.rieval 5ystenl. or transmitted, in any fimn, or by any means, electronic, mechanical, phmocopyillg, record.ing or otherwise, without the prior permission in writing, from t.he author.

Cover concept Cover design: ISBN: Printing:

jlatrick Cleiren Patrick Cleiren 90-90! 9465-7

Efficiency of Employment Subsidies

and

Firms' Recruitment Strategies

PROEFSCHRIFT

Ter verkrijging van de graad vall doctor aal1 de Univcrsiteit Maastricht op gezag van de Rector Magnificus,

Prof. ml", G,P.M.F. Mols

volgens het besluil van hl':'t College van Decanen, in het openbaar Ie verdedigen

op vrijdag

n

mei 2005 om 12,OOuur

door

Promotor:

Prof. dr. J. Muysken

8e~()rdeli"gscom rilbsie;

Prof. dr. ClN. de Neu'bourg (Voorzitter)

Prof. dr. lAM. Heij ke (ROA I Universiteit Maastricht) Prof. dr. ir.

1.e.

van Ours (Umversiteit van Tilburg)

Finnllci~le ondersteuning:

Table of

COl1ltents

Table of Contents List of Figures List of Tables Notation Preface

Chapter I: [ntroduction

1.1 Motivation and research question 1.2 The chameleotHe traits ofur:employment 1.3 Active labour market meas.ures: a panacea for long-tenn unemployment

1.4 firm hiring behaviour: tracil1g the culprit 1.5 Taking stock: dissertation outline

Chapter 11: Recruitment among Rejects 2.1 Introduction

2.2 A sequential employer search model 2.3 The hiring model

2A Introducing employment subsidies 2.5 Applying the model to the Dutch case 2.6 Conclusions

Chapter

In:

Outsmart the Outliers

3 I Introduction

3.2 Wage subsidy schemes 3.3 Training subsidy schemes

3.4 Costs of preventing deadweight loss 3.5 ConclUSions

Chapter IV: Employer Search and Wage Subsidies

4.1 Inrroduction

4.2 A sequential employer search model 4.3 Empirical employer search literature 4A Dutch wage subsidy

4.5 Empirical results on Du(ch data 4.6 British wage subsidy

4"7 Empirical results on Brirish data 4.8 Overall results for wage subsidies

4.9 Conclusions

Chapter V: Employer Search and Training Sub!lidies

S.l InlroductlOn

5.2 [mp[nyer search and wage subsidies

TaMe vfCom~nf.,..

5.3 Employer search and training subsidies 88

5.4 British training subsidy 94

5.5 Empirical results 011 British training subsIdy data 95 5.6 Taking sLock: training versus wage subsidy schemes 102

'\ 7 Condusions 102

Chapter VI; Making a Virtue of Need 105

6.1 Jfltroduction 105

62 Philips Employment Scheme in retrospective 106

63 The Philips (ynuth) employment scheme lOS

6.4 Effectiveness of the PES 110

6.5 The Philips Employment Scheme in perspective 114 6.6 Keys to success of PES and .Iessons for public schemes 116

6.7 Potential pitf1tlls oftilc PES 117

6.8 Privale employmeni schemes as a contribution to the pub lie

iniLiativ('. 1 I ~

6.9 Conclusions 120

Appendix 6. J 121

AppendiX 6.2 122

Chapter VII: Cunei u!iions 125

7.1 Recapitulating 125

7.2 Recommendations 127

7.3 Limitations 128

Reference.'; 131

Summary in Dutch 139

Curriculum Vitae 144

List of Figures

Chapter 1 : Introduction

Figw'e L 1 Evolutions in long-tenn unemployment I Figure 1,2 Transition rates from short to long-term unemployment 4 Figure 1.3 Hazard raks for the Netherlands, 1987 5 Figure 1.4 Change towards active l.abour market measures 7 Chapter II: Recruitment among Rejects

Figure 2.1 Composition of active labom' market measures, the

Netherlands 1990-2001 19

Figure 2,2 Link between unemployment duration and product.lvi!y 24

figure 23 Overview of the hiring procedure 25

Figure 2.4 The effects of the screening device standard on the

employment OUTcome 33

Figure 2.5 The impact of employment subsidies 34 Figure 2.0 Tile imllact of profiling on subsidy efficiency 38 Chapter' 1[1; Outsmart the Outliers

Figure 3.1 A (search extension motivated) \'iage subsidy 41

Figure 3.2 Evolution ofreCfuitment costs 44

Figure 3.3 Deadweight loss incidence in fI wage subsidy 46 Figure 3.4 Deadweight loss incidence in fI non-uniform wage subsidy 49

Figure 3.5 A training subsidy 53

Figure 3.6 Potential threat of deadweight loss in a training subsidy 56 Figure 3.7 A voiding dcadweight loss by careful government intervention 57 Chapter IV: Employer Search and Wage Subsidies

Chapter V: Emr)(oycr Search and Training Subsidies

Chapter VI: Making a Virtue or .;\Iced

Figure 6.1 L' ncmploymenl rates in the Netherlands ~ U6 Figure 6.2 Schematic overview orthe Philips Employment Scheme 1(1)

Figure 6.3 Outllow rates

or

PES participants III

Chapter V1I: ConC\usion~

List of Tables

Chapter I: Introduction

Table 1.1 Share of various types of active measures in total ALMP

expenditures, 2002 8

Table 1_2 History of efficiency of employment subsidies in some

OECD countries 12

Table J.3 Finn's recruitment channel cboice, the Netherlands, J 986 14 Table 1.4 Firm's recruitment channel choice, the Netherlands, 1991-1994 14 Tahle L5 I~inl1's hiring behaviour to industry, US, 1981 ! 5 Chapter 11: Recruitment among Rejects

Table 2.1 Characteristics Dutch employment suhsi.dy measures 20 Chapter 111: Outsmart the Outlien

Table 3.1 The firm's set of strategies following the government's subsidy

grant 45

Table 3.2 The fiml's strategy following the govemtnenfs mispcrceptioll 48 Tahle 3.3 The finn's incentives following a training subsidy 55 Chapter IV: Employer Search and Wage Subsidies

Table 4.1 Effects on intensive search costs 67

Table 4.2 Descriptive statistics V L W data 69

Table 43 Overlap between two constructs to measure deadweight loss 71 Table 4.4 Set of independent variables to test for deadweight loss 72 Table 4.5 Ordinal probit regressions of deadweight loss in VWL 74 Table 4.6 Descriptive statistics NDL TU data 78

Table 4.7 Deadweight loss construction 78

Table 4.8 OrdLnal probi! regressions of dClldweighL loss in ~DL TU 80 Table 4.9 firm's recruLtment behaviour given the number of applicants 82 Table 4.10 Summary ol'results from Dutch and British duta 83 Chapter V: Employer Search and Training Subsidies

Table 5.1 Summary ofresults from Dutch and British data 89

Table 5.2 Descriptive statistics NDYP data 95

Table 5.3 Ordinal probit regressions of deadweight. loss in J\J)YP 96 Table 5.4 Ordinal probi! ,I lObit regressions of length training period 100 Table 5,5 Summary ofresults hom Dutch and British data 101 Chapter 'VI: Making a Virtue of Need

Table 6.1 Explaining the outflow rate to employment 112 Table 6.2 Participant and labour market characteristics rES for cohons

1997 and 2001 113

Table (d PES characteristics and comparable programmes initiated

Lis/ rfT"hI,"s

by the government

Table 6.4 ChaIacterislics Dutch wage subs:idy schemes Table 6.5 Charactcrrstics Dutch unemployment p(mj

Table A6.1 Deadwei.ght foss in rbe Philips Employment Scheme Table A6.2 Contrac! duration Ventleend-Moor Act in ) 98 8

Chapter VII: Conclusions

VI

114

115

119

Notation

Lmin alphabef

A area representing unemployed who meet the screening devitt' slHndard but not thl~ productivity standard

a ability

G""e average ability of subsidy entitled unemployed

Q",ac maximum abi.1ity

am", minimum ability

B area representing unemployed who meel the productivity standard but not the screening device standard

h cost of carrying oul an assessment

C area repmsmting unemployed who meet both tho;' productivity and the screening device standard

c

periodical cost offorcgone productivity

D area representing unemployed who neither meet the productivity standard nor the screening device standard

d cost to upgrade tbe productiVity level of the

mosl

able appl icanl with a single productivity unit

1:: employment

e cost of activating the cheapest recruitment channel

HC hiring costs

i1rm

j job seeker

r

labour supply

{! labour demand

q arrival rate of job seekers

p productivity

p" minimum productivity to be productive on the job

rf

minimum productivity level to be entitled to a training suhsidy

PP participation profit

p" minimum productivity to be conSidered for ajob

p" maximum productivity to he enl it led to a training subsidy

Pm",- maximum available productivity wit.hin an unemployment cohort

pmir. minimum available productivi1y within all unemployment cohorl

r recnJiunent channel

Re

recruitment costs

T

total size of the unempLoyment pool TC schooling cost.s

unemployment duration

IH/f~ first cohor! of uJlemployed which cOllLams unemployed whose productivity .ha~ depreciated below the productivity standard

r~lax first cohort of unemployed which no longer contains unemployed who meet the productiVity slandard

l

screening device standard set by the firm t"~ first unemployment cohort to be subsidy entitled { last unemployment cohort to be slibsidy entitled

If unemployment rate L/ unemploymenloutcomc

v vacancy rate

w wage

Greek alphabet

u probabiliry to accidentally cause deadweight loss when purswng the optimal hiring

~l:rategy

X average number of assessments needed to find an applicant who meets the pmductivity slandard

5 prod ueti vity discount factor s wage / training subsidy

~ mark-up on costs d, for trainmg individuals having ability levels beJow the maXllmllll ability level

'1 productivity discreparlcy between the productivity standard and the job seeker's productivity

t1 units of schooling costs needed to upgrade productivity to the productivity standard

Ii) average number of appjicants needed before a second arrives who meets the

productivity standard

{p number of periods needed to

filt

tbe vacancy

K distribution function of productivity over a cohort of unempfoyed

A- job separation rate

~l mean

o

labour market tightness p productivity deprec lation rate () standard deviation

tjI average number of periodS between ffi'o applicants

:, mark-up 011 the costs of the cheapest recmitment channel

or

usmg a dlfterent recruitment channel

Preface

\Vbcn Joan MllY5ken contacrcd rue to consider writing a Ph.D~ back in ~utumn 1999, ! was surprised. Not 50 much ar the fact that be asked me, but more since it wns only 30 minulcs after 1 had told Tom van Yeen that f \vas pondering my future. Should I inlerprel thal as a wann welcome or is it a bad omen if people wan! you desperately'! Anyway. I've never regretted the decision to actually start writing the Ph.D.

I used the degrees of freedom Joan provided concerning the subject choice ... anything, as long as it involved the labour market - to resume my interest in flctive labour mmkel policy. A subject I dug into when writing my master thesis a few years earlier. It is fl fascinating subject, since it is hard to grasp why govemments spen, - and continue to spend -so much money on active labour market policy, while its effectiveness is consistently pmveil to be low.

In spring 2000 \'>e had produced a research proposal which mel with approval of METEOR, the Maastricht graduate research school. The subsequent grant enabled me to start my Ph.D. in September 2000. In the following four yearR 1 met some cDlleagues who made my stay at building excavation TS53 an interesting one and therefore deserve .;redit,

Special thanks go to Joan Muysken fol' putting trust in me and guiding me through tile process. Though the number of official meetings we had must have been historically low, he never disappointed me when J used one of his favourite sayings to backfire on him: 'lTupper toujours'.

Next to my supervisor, I want to thank all colleagues and scm:inar / conference participants who at some stage contributed to this Ph.D. Speciall.hanks go to the members of the reading committee Chris de Neubourg, Hans J-leijke and Jan van Ours. Furlhermore I thank Bertrand Candelon, Denis de Crombrugghe, Pieter Gamier, Christian Kerckhoffs, Ben Kriechel, Eric de Regt and Sybrand Schim van de!" Loeff who critically read preliminary versions of chapters of the thesis.

Subsequently, I would like to express thanks to three persons who made the data available, which allowed me to do the empirical analyses, Peter Donker van Heel of the Netherlands Economic Institute, Ton van der Bruggen

of

Philips Electronics and Jail Hales of the National Centre for Social Research do not know how valuable their support has been to me,

Next, 1 thank my room-mares. Arnald Kanning introd uced me into his peculiur view on life in general and university in particular, Unfortunately, a lack of cubic conknt and later an asbestos pollution ended this partnership and my residence at the fourth floor. Subsequently, I moved to the first floor, where I built up a new partnership with Mark Sanders, whose general knowledge i interest is sec()nd to 1l01le. Student~ who cOl11mitted plag!arism still regret the university's decision to mix us up in one room. After Mark's departure and the ex.plosion of the Genera! Economics department· - though I Hm sun: this time il is not building workers who were responsible for (he damage - Gcranda Notten accompanied me in the final stages of my Ph.D. Her determination in mastering STATA commands slmck the eye and was a shining example to me to finish the tai I end 0

r

my lhe~l~. Finally, bearmg in mind Ihat I commuted 30 minutes daily by train, I roughly spent 20 days in railway carriages. Silvana de Sanctis, Ronald Peeters and Kirsten Rohde macle it pleasant trips.

For his help in designing the thesis I thank Patrick Cleiren, Moreover, I thank my 'paranimfen' for standing by during the defence of this thesis and Sylvia BeenCIl, Celi ne Duijsens-Rondagh and Susan Roggen for minimizing bureaucracy 111m)' working life.

Welters - Jorrs and Hub Welters, my brother Lando We.lters and LB. Perhaps I have never been very explicit 00 what I ex.actly did the las! few years, bLit please take comfort from tbe fact that it was not Ufll'lliUingness but sheer incapabIlity from my part.

RW, Maastricht, April 2005