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

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? II 4 main types of ALMP 1.Training 2.Subsidized employment: direct job creation, wage subsidies 3.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 institutions 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.

Outline 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.

Measures 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 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 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 v1v1 u2u2 u1u1 CA BC 1 Unemployment rate (%) Vacancy rate (%) BC 2

Box 12.1 Beveridge curve and matching function William Beveridge ( ) 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 sanctions Search-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 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 – experimental 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 States 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 week 2.No specified number of contacts 3.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 II Klepinger, Johnson, and Joesch (2002) Control group Additional contacts No report Work- shop Verify contacts UI benefits ($)2085– 116*34– 75*– 113* Weeks of benefits11.9– 0.7*0.4*– 0.6*– 0.9* Exhausted benefits (%)28.3– 2.5*1.5*– 1.1– 2.8* Percentage worked – Earnings ($) *– 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 Denmark 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 – non-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: Do we need public employment 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: 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 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 questions 1.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.