Rheinisch-Westfälisches Institut für Wirtschaftsforschung 1 J Kluve Successes and Failures of Labor Market Policy in Europe Jochen Kluve (RWI Essen, Germany) Colombia Employment and Development Conference Bogotá, November 14, 2008

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 2 J Kluve Introduction  Majority of countries worldwide has implemented certain labor market policies: unemployment benefits, training for the unemployed, etc  While labor markets are heterogeneous by country, these policies are similar, and their general objective is the same: increase employment, reduce unemployment  Important for countries to learn from each other’s experience  Europe: many different countries within relatively small space, many experiences with different labor policies

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 3 J Kluve Today‘s presentation  European labor markets: Unemployment and policy spending  Passive and Active Labor Market Policy  Knowledge on ALMP effectiveness  Types of countries  Systematizing the evidence: Meta-analysis  Failures and successes

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 4 J Kluve

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 5 J Kluve Unemployment in Europe Source: Eurostat

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 6 J Kluve Youth unemployment in Europe Source: Eurostat

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 7 J Kluve Long-term unemployment in Europe Source: Eurostat

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 8 J Kluve European labor markets: overview Unemployment in 2005: EU-15:8.0%14 Mio., of which 4.7 Mio. LTU EU-27:8.9%19.3 Mio., of which 7.9 Mio. LTU Spending (2003): EU-15:65 Bio. Euros on active labor market policy =.75% of GDP 25 Bio. Euros on training programs 126 Bio. Euros on passive labor market policy (Eurostat)

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 9 J Kluve “Passive” labor market policy  “Out-of-work income maintenance and support”, i.e. unemployment benefits and unemployment assistance  Early retirement schemes  Administration of the Public Employment Services (PES)  ”Administering unemployment”

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 10 J Kluve Types of Active Labor Market Programs 1.(Labor market ) training: human capital accumulation 2.Private sector incentive programs: employer and worker behavior 3.Direct employment in public sector: public job creation 4.Services and Sanctions: job search efficiency 5.Youth programs 6.Measures for the disabled

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 11 J Kluve EU spending by program type Source: Eurostat

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 12 J Kluve Knowledge on ALMP effectiveness For a particular country: Labor market policy  Types of Active Labor Market Programs  Design of the unemployment insurance system (passive support)  Interaction of the active and passive systems (sanctions, “rights and duties”) Evaluation practice  Data collection  Academic and government-sponsored research  Policy interest in learning about program effectiveness [Countries are heterogeneous  systematize information]

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 13 J Kluve Northern Europe Western Europe Southern Europe Eastern Europe

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 14 J Kluve “Northern Europe” Labor market policy  Comprehensive use of Active Labor Market Programs (Sweden: since the 1970s)  Generous unemployment insurance system (Denmark: 90% replacement rate)  Program participation ultimately compulsory for the LTU Evaluation practice  Comprehensive data collection (administrative)  Multitude of academic evaluation studies  Changes in policy? To some extent

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 15 J Kluve “Western Europe” Labor market policy  Less comprehensive use of Active Labor Market Programs, but still substantial spending  Fairly generous unemployment insurance system  Many countries (e.g. Germany, Netherlands, UK) have introduced sanction elements over the last decade Evaluation practice  Less established, mostly triggered by EU, in some countries rapidly evolving (Germany)  Increasing number of academic evaluation studies  Changes in policy? Unclear

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 16 J Kluve “Southern Europe” Labor market policy  Little use of Active Labor Market Programs, often regionally focused  Less generous unemployment insurance system Evaluation practice  Program evaluation rather uncommon  Some academic evaluation studies exist  Little is known on ALMP effectiveness

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 17 J Kluve “Eastern Europe” Labor market policy  After breakdown of Communist regimes, systems of active and passive support built from scratch, often copying Western systems  Little use of Active Labor Market Programs in most countries, some exceptions are Romania and Poland (in the 1990s)  Unemployment insurance system offers basic support Evaluation practice  Program evaluation rather uncommon  Some academic evaluation studies exist  Little is known on ALMP effectiveness

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 18 J Kluve Spending on ALMP in Europe (%GDP)

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 19 J Kluve How to systematize the evidence  Meta-Analysis: Collect evaluations of Active Labor Market Programs from all over Europe (following certain requirements)  137 studies  For each study: Does the evaluation find a positive, negative, or zero effect of the program (on employment)? [75 +, 33 Ø, 29 –]  Then analyze if there is a systematic pattern by program type: 1.Training(70) 2.Private sector incentive programs(23) 3.Public sector job creation(26) 4.Services and Sanctions(21) 5.Youth programs (35)

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 20 J Kluve Other factors that may influence effectiveness For each country: Labor market institutions  Gross replacement rate  Regulation on dismissal protection  Regulation on fixed-term contracts  Regulation on temporary work (OECD indexes) Economic context  Unemployment rate  ALMP expenditure as % of GDP  GDP growth Study design (method, sample size)

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 21 J Kluve Results: ALMP effectiveness in Europe Picture emerging from analysis surprisingly clear-cut:  Little systematic relation between program effectiveness and contextual factors  Exception: restrictive dismissal regulations  Instead: the program type matters

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 22 J Kluve Failures?  Direct job creation in the public sector very rarely has a positive effect on participants’ employment probability. Quite the opposite: effects are frequently negative.  Training programs have mixed effects, but generally tend towards positive impacts (see “successes” next slide), though maybe not as clearly / strongly as one might have hoped for.  Young people seem to be particularly hard to assist. Indeed, most youth programs fail. Perhaps ALMP is not the right type of policy for this group  Preventive measures.

Rheinisch-Westfälisches Institut für Wirtschaftsforschung 23 J Kluve Successes?  Training programs are modestly effective on average. There is some indication that impacts materialize in the longer run (human capital accumulation).  Private sector incentive schemes such as wage subsidies and start-up grants generally show positive effects. Caveat: Not much is known about substitution or displacement effects and deadweight loss.  “Services and Sanctions” seem particularly successful: Apparently many unemployed can be helped with basic job search assistance measures. Also, sanction elements mobilize the unemployed. These measures are also likely cost-effective.