Table of Contents

1. Introduction and Overview *

2. So, Why the Emphasis on Active over Passive Labour Market Policies? *

3. Some potential benefits of Active Labour Market Policies *

4. Negative Consequences of Enacting Active Labour Market Policies, in brief *

5. Problems with ALMP Evaluations. *

6. Conclusions *

7. Appendix: Case Study - Ireland *

8. Bibliography *

 1. Introduction and Overview

Both the OECD and the EC are agreed that there needs to be a shift away from passive income support measures towards more active measures designed to get the unemployed back to work (Martin, 2000, p.88). However, there has only been limited success so far as rising unemployment across Europe has led to a correlated rise in expenditure on passive measures. Many European countries have enacted specific measures in terms of activation strategies (Ireland, UK, Denmark, Luxembourg) or training measures in order to facilitate easier job search and to increase the skills levels of the unemployed.

Before we continue, a caveat must be sounded. The available statistics do not appear to adequately

account for the auto-correlated effects that changes in the unemployment rate have on passive measures. This has severe implications for the evaluation of ALMP's over time. The case is perhaps best illustrated by an example. Ireland has experienced rapid changes in its unemployment rate since the early 1990's, from 15.6% in 1993 to a low of 4.7% in March 2000. This has naturally led to a decline in expenditure on passive measures, however, ALMP's are far less responsive to changes in the unemployment rate and have not changed to the same degree. So, despite the fact that there has been a decisive policy shift in Ireland towards ALMP's, the extent to which this has actually occurred has been masked by changes in the overall unemployment rate.

One issue from the topic area which deserves more attention, is the focus on the long-term unemployed (LTU). Obviously there are social equity reasons for wanting to include the LTU and I will examine these later, but for the moment I want to focus on economic justifications as this has become increasingly important for European governments in a period of fiscal consolidation. Nickell (1997) justifies the emphasis on the LTU, because according to him they have little impact over wage pressures and hence inflation. He argues that the LTU are far enough away from the active Labour Market that their presence has little influence on wages. He argues that if an appropriate microeconomic policy can eliminate long-term unemployment, that it would have few adverse macroeconomic implications. More exactly that there should only be a need for a minimal rise in short-term unemployment in order to maintain stable inflation. Adnett (1996, p.247) also places an emphasis on the 'potential' LTU, as the costs involved in reintegrating the LTU back into the Labour Force are far more than those preventative, early measures which aim to prevent people becoming unemployed. It is for this reason that some countries have started to draw up profiles and work-plans for those most at risk of becoming unemployed.

Simply put it boils down to an issue of equality which is based around notions of insiders and outsiders. Many commentators believe that ALMP’s can lead to a more equal society where more people are unemployed for a short period of time, as opposed to the current situation where a small number are long-term unemployed. ALMP’s can lead to a far better allocation of resources by helping the unemployed to gain information about existing vacancies and by providing these people with the skills necessary to fill them. These measures can lead to a redistribution of existing jobs as opposed to necessarily adding to the overall number of jobs and we call this effect the substitution effect, which in one sense is both a negative and a positive consequence of ALMP’s. The question is whether people with jobs (Insiders) have a right to exclusive access to full-time employment at the expense of the unemployed (the Outsiders)?

This could be argued to be especially true for Europe, where unacceptably high and persistent levels of unemployment have led some commentators, such as Dahrendorf (in Leisink and Coenen, 1993) to describe work itself as a scarce commodity. If we accept the principle that everyone has a right to work ( a contested topic) then surely, if work is a scarce commodity, then unemployment must be shared more equally between all citizens.

ALMP's are seen as a mobilisation of the unemployed through active engagement and monitoring. They are seen to be far more effective than passive measures which merely maintain people at a particular standard of living, without providing incentives for people to enter into full participation of the Labour Market. This can lead to long-term unemployment and hysteresis as people's human capital and worker esteem and motivation decline the longer they are without work. It can also lead to people being caught in a virtual cycle of poverty and welfare dependency, which can lead to entire areas being populated with mainly discouraged workers. There are also interactions between passive measures and replacement rates , which can lead to the development of unemployment and poverty traps. These are cases where it works out to be economically advantageous for some low-income earners, particularly those with dependants, to remain on welfare, rather than take a low-paid job. It is for such reasons that some authors (especially within the OECD) have called for the 'activation' of passive measures, by including measures such as re-employment bonuses, in-work benefits, regular profiling, job clubs etc. The idea being that it should always be better for people to work than to stay at home. This echoes the ideas of Anthony Giddens when he advocated the concept of the ‘Social Investment State’.

Now, I will turn my attention to the five main types of Active Labour Market Policies and examine some of the current discussions about there effectiveness :

1. Public Employment Services and Administration: Includes job placement, administering unemployment benefits and referring job-seekers to available openings on labour market programmes. According to Fay (1996, p.23) this is the type of ALMP's that prove to be the most effective in terms of efficiency and cost. Particularly the component of these services that covers job-search assistance. Examples abound, but see for example the Restart Interviews in the UK, or as I will elaborate on later the activation strategies of the PES and FÁS (the employment and training authority … the word in Irish means Growth) in Ireland (see Case Study). Another area highlighted in Martin (2000, p.95) is that of cash bonuses which are in place in Japan and Korea and would seem to significantly reduce the length of time spent on welfare benefits by recipients.
2. Labour Market Training: This is divided into two primary sub-groupings: (a) Firstly, spending on vocational and remedial training for the unemployed, and (b) training and/or up-skilling for employed adults for Labour Market reasons. This is traditionally the area which commands the largest proportion of spending on ALMP in OECD countries and they represented 24 percent of expenditure in 1997. However, evaluations of such measures have shown very mixed results. One obvious consequence of this type of Labour Market intervention is that the recipients are unavailable for work and therefore cannot partake in job-search activities. However, this argument is not very convincing as certain people lack the skills and aptitudes to engage in a meaningful way in the Labour Market. Without training, these people would continue to represent a drain on society and would have very few opportunities for advancement (economically speaking). Training measures do work, however, and have been shown to be particularly effective for adult women and sole parents. Especially in terms of earnings gain and higher positive rates of return for these categories. However, for adult males the situation does not appear to be quite so promising, with the worst results being shown for out of school youths. In summary, Martin (2000, p.93) concludes that best returns can be got if these programmes are (i) very tightly focussed, (ii) relatively small and (iii) if they include an on-the-job component. One especial advantage of on-the-job training ( particularly in private firms) is that they provide the ‘outsiders’ with information on available job opportunities and with the necessary relevant skills in a real, productive work environment.
3. Youth Measures: These comprise mainly of (a) training and employment programmes and (b) apprenticeship training, which tends to focus mainly on school-leavers as opposed to the unemployed. This would appear to be a very difficult group to target effectively, with few programmes achieving earnings gains for the young people or net social gains to society. Grubb (1999 in Martin, 2000, p.96) has identified some best practices which appear to enhance effectiveness. Programmes should maintain a close link to the local labour market; should contain an integrated mix of academic, occupational and on-the-job training; should contain links to further training and education and include a range of supporting services aimed and the young people and their families and finally there should be constant monitoring of the programme in order to enhance effectiveness.
4. Subsidised employment: is divided into three categories: (i) hiring subsidies, (ii) assistance for unemployed workers who want to set up their own businesses and (iii) direct public/non-profit sector job creation. These schemes come in for heavy criticism, especially from the OECD (see Fay (1996, p.19-21) or Martin (2000, p.97-98). There is very little net job creation as a result of the high substitution and dead-weight effects (as much as 36 percent and 53 percent respectively in a Belgian study, quoted in Fay (1996, p.18)). There are however equity reasons which could justify a certain amount of displacement effects, mainly that the long-term unemployed are given access to the Labour Market. However, the net gains remain small and the consensus appears to be that these programmes can help some people, but that they need to be very tightly targeted and need to include an element of employer monitoring in order to minimise abuse of the system. Evidence from the US (as well as the UK, Ireland, Australia and Norway) indicate that giving support to certain types of unemployed (esp. Middle aged men, 30-40) can be very beneficial. The measure that shows the least signs of hope are the many public employment schemes. These are seen as low productivity jobs that do not provide recipients with the adequate skills they need to compete on the open labour market and lead very few people into more permanent employment. Martin (2000, p.98) advocates using them as ‘work-tests’, or as a means of letting the unemployed maintain contact with the labour market, but that is about all.
5. Measures for the Disabled: This includes both vocational and sheltered work programmes which directly employ disabled people.

There are three main types of negative consequences of ALMP’s:

1. Dead-weight Loss: This is when a subsidy is in place even though the employees would have been employed anyway.
2. Substitution Effect: When a programme leads to a redistribution of jobs, as opposed to necessarily increasing the overall number of jobs, it is said to have had a substitution effect.
3. Displacement Effect: Firms that use wage subsidies should have a higher productivity and therefore should displace those firms that do not.

More generally, ALMP’s can lead to higher wage demands or at the very least reduce downward wage pressure. There is a trade-off between unemployment and inflation. ALMP’s can also lead to distortions in the Labour and Product Markets.

I would like to briefly go over some of the complications surrounding the analysis of ALMP on the global context. Firstly, there is a lack of genuine evaluations of many types of ALMP’s and where they do exist, they appear to be largely originating from North America. While some European countries, such as the Nordic countries as well as the UK, have started to put these evaluations in place it has to be asked as to how useful for European policy makers who have to contend with an entirely different institutional setting. Another issue surrounding these evaluations is that the "outcomes" tend to focus on the impact the programme had on future earnings and/or re-employment prospects of the participants. There is rarely any mention of the potential social benefits which could accrue from such measures (Martin, 2000, p.91). Finally, while these evaluations tend to tell us what works (or not), they are not very useful at explaining why they work better for some groups more than others and in what circumstances they work

The outlook for ALMP’s and Labour Market interventions may not look too hopeful, when one examines the material that comes from the various evaluations, however if one accepts that Labour Markets are a very complex process which we are only beginning to learn about, then much becomes possible. There are signs of hope and as long as interventions are well co-ordinated and sustained, then positive results appear more likely. As Calmfors (see Martin, 2000, p.107) has rightly warned, ALMP’s are not the answer to unemployment on their own. Without a reasonable supply of jobs, no amount of ALMP’s can hope to alleviate unemployment. However, as part of the right policy mix, ALMP’s can be a very important tool in the struggle against unemployment.

The Irish economy in the past few years has shifted from the ambition of purely economic growth and net job creation to a situation where labour and skills shortages are emerging. As a consequence, Labour Market Policy has shifted towards assisting the remaining unemployed in their attempt to re-enter the labour market and towards increasing labour market participation rates. They have also set themselves the target of eliminating long-term unemployment and enhancing the quality of labour through lifelong education and training.

The most significant ALMP dimension of the Irish National Action Plan for Employment, 2000, has to be the inclusion of an Activation and Engagement strategy operated by both the National Training Agency (FÁS) and the Public Employment Service (run through the DSCFA).

The programme started in March 1999 and the early results would appear to be remarkable. First to be targeted were the under-25’s unemployed for 18 months or more and the programme has been rapidly expanded to include all under-25’s as low as 6 months unemployed as well as the 25-34 age group. The rates who left the Live Register were very impressive, ranging between 70%-82%, depending on the category, while the proportion of those who left for known positive reasons, was also very high ranging from 54%-62%. Of the total referrals to the scheme in 1999, 28% went into work, 5% into training or education, 10% into other benefits, 16% were found to be not entitled, while the remainder had either gone abroad, had not signed, or were unknown. These results would seem to give at least an initial justification for the use of this type of intensive counselling style – job search assistance and career planning, that has been so well received by the OECD and the EC.

For a full analysis of these programmes, please follow these two links:

Ireland’s National Action Plan, 2000: http://www.entemp.ie/lfd/eapirl00.pdf

and monthly updates on the web from the Dept. Of Enterprise & Employment’s Labour Development Unit: http://www.entemp.ie/lfd/r17feb00.pdf

Visit the ELM 2000 homepage

Adnett, N (1996) European Labour Markets Longman

Calmfors, L (1994) "Active Labour Market Policy and Unemployment – A Framework for the Analysis of Crucial Design Features", in OECD Economic studies No. 22

Elliot, Robert F. (1991) Labor Economics. A Comparative Text, McGraw-Hill

Fay, R.G. (1996) Enhancing the Effectiveness of Active Labour Market Policies: evidence from programme evaluations in OECD countries, OECD Labour Market and Social Policy occasional papers no.18.

Martin, John P. (2000) What Works Among Active Labour Market Policies: Evidence From OECD Countries’ Experiences in OECD Economic Studies No. 30, 2000/1 OECD: Paris

OECD (June 1999) Employment Outlook: Giving the Youth a Better Start, OECD: Paris

Visit the ELM 2000 homepage