Active Labour Market Policies Are Not a Panacea

This blog is based on an article in the Journal of Social Policy.  Click here to access the full, open access article.

Existing studies on the effectiveness of ALMPs show ambiguous results. To date, two main reasons are reported. First, varying degrees of effectiveness are reported. This differs between the various types of ALMPs and between various target groups. Second, the level of analysis also matters in the ability to observe specific effects. For example, a study on the individual level investigating a hiring subsidy programme may report a positive effect on the probability of obtaining employment by people with a great distance from the labour market. However, a country-level study of the same programme might find no effect due to aggregate dynamics, such as substitution effects. Subsidised labour replaces regular labour and therefore lowers the probability of employment by similar but unsubsidised workers. This results in a net effect of zero as the positive and negative effects cancel each other out.

However, we argue that other policies and legislation, i.e. institutions, might also play a role in the observed differences in the effectiveness of ALMPs. In the academic literature, the idea that one institution can improve the effectiveness of another institution is described as “institutional complementarity”. However, if an institution can improve the effectiveness of another institution then it can also worsen efficacy. In our study, we focused on how the relationship between ALMPs and long-term unemployment and how this differs between different types of labour markets, with varying degrees of employment protection and benefit generosity.

ALMPs can influence long-term unemployment in several ways. First, they can address the economic self-interest of the demand and supply side of the labour market. For example, ALMPs can be aimed at improving the labour market position of target groups by financially incentivising employers to hire certain groups.   Second, ALMPs may strengthen the labour market position of programme participants by improving their skills and knowledge to increase the probability of a successful match. And third, these policies might try to reduce information asymmetry by providing employers with opportunities to obtain more information on the programme participant and thereby reduces the need of employers to rely on preconceptions during the hiring process based on group membership.

However, it is also possible that ALMPs produce counterproductive effects. For example, if a programme is directed at a target group with a large distance to the labour market it might also serve as a signal for employers that a participant is potentially problematic and will therefore not hire such a person. Participation can then function as a stigma. However, it is possible that certain effects are generated alongside other institutions, such as employment protection legislation and unemployment benefits.

It is argued that flexible employment protection reduces the financial risks of hiring due to lower firing costs.  On the other hand, it is also argued that since it is easier to fire workers, people with a weak labour market position have more irregular labour market histories in flexible labour markets due to adverse selection. This suggests that more activation resources are needed for programme participants to obtain positive results compared to labour markets with strict employment protection.

Furthermore, generous unemployment benefits can also potentially improve or worsen the effectiveness of ALMPs in combating long-term unemployment. Generous unemployment benefits protect the unemployed from poverty, which improves the quality of job search behaviour and programme participation. However, due to the financial disincentive to search for jobs, it can also be argued that generous unemployment benefits extend the duration of programme participation, i.e. induce a lock-in effect, which increases the probability of long-term unemployment.

In order to study these ideas, we used longitudinal data on European countries that contained information on various labour market institutions and other characteristics from 1996 till 2012. A differentiation was made between multiple types of ALMPs, namely public employment services, (PES), training programmes (ALMP training) and employment programmes (ALMP employment). The results show that, depending on the programme type, the relation between ALMPs and long-term unemployment differs by various degrees of both employment protection strictness and unemployment benefit generosity. The results are visualised in Figure 1. This figure shows that both public employment services and training programmes are associated with less long-term unemployment in labour markets with relative strict temporary employment protection. The results also show that employment programmes are associated with less long-term unemployment in labour markets with relatively less generous unemployment benefits.

Figure 1. Effect Plots of the Relationship between ALMPs and Long-Term Unemployment by Employment Protection Strictness and Unemployment Benefit Generosity.

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The results suggest that certain programmes might produce intended effects in one type of labour market, for instance lowering long-term unemployment through up-skilling,while it might induce an unintended effect in another type of labour market, for example locking participants in programmes, which increases the long-term unemployment probability. This implies that studies that are conducted within a specific country are not generalizable as the observed effect might be the product of the interaction of the programme with the wider institutional frame in which the programme is embedded. The results also imply that the effectiveness of programmes that are designed and implemented on the municipal level are also affected by policies and laws on the national level. This reduces the influence of local policymakers have on the effectiveness of labour market programmes.


About the authors

Luc Benda is a Postdoctoral Researcher at Erasmus University Rotterdam.

Ferry Koster is Associate Professor at Erasmus University Rotterdam.

Romke van der Veen is Professor in Sociology of Labour and Organisation at Erasmus University Rotterdam.

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