Labour market policies and institutions
(Readings: Holmlund, Grubbs & Martin.)
• Labour market policies are divided into active
and passive.
• Passive labour market policies: Financial
support for the unemployed.
– Unemployment benefits/insurance
– Early retirement for labour market reasons.
• The tasks of active labour market policies
(ALMP) are
– to reduce search time by improving the information
that those who search for jobs and for workers have
about each other.
– To adapt the supply of labour power to demand.
To reduce unemployment
• Adapting institutions, structures, legislation
– the workings of the labour market
• Labour market policies
• Countercyclical policies (stimulating
aggregate demand in downturns).
History:
• In the late 19th century, workers and unions
began to set up “mutual aid funds” to support
those hit by illness or unemployment. The
unemployment insurance funds received state
support from 1935.
• At the beginning of the 20th century, municipal
Employment Offices (arbetsförmedlingar) were
set up. In 1948 they were centralised and
responsibility transferred to central government.
• During the inter-war period, the state paid some
unemployed workers for work in public projects
– with lower pay than market wages.
After WWII:
• How to get
– Full employment
– “Equal pay for equal work”
– Favourable conditions for structural and
technological change
• without
– High inflation
– Poverty wages
A dilemma for economic policy:
• With restrictive fiscal policies, some firms
would not be able to hire workers/some
workers would not be able to find jobs or
only find them at very, very low wages.
• With expansionary fiscal policies, there
would be inflation and less
competitiveness on the world market.
The Rehn-Meidner model
• LO-economists Gösta Rehn and Rudolf Meidner
proposed:
• Restrictive fiscal policies
• Solidaristic wage policies (“equal pay for equal work”) for
equity reasons and to avoid compensatory wage
demands.
• Targeted measures for workers who had problems
finding jobs – retraining, subsidies, public works.
• Measures to encourage re-structuring – investment in
industries with high productivity, mobility of workers.
• ALMP was an earlier and larger part of Swedish
policies than in other countries - and integrated
with general economic policies.
• In most OECD countries, ALMP have become
more and more important – more in Western
Europe than in US. (Sweden’s spending no
longer exceptional.)
• The unemployment crises of the 1990s led to a
large increase in LMPs – the passive increased
most but there was also a large expansion of
ALMP.
LMP spending (% of ALMP/total spending,
GDP)
%
1989
1993
2000
1989
1993
2000
OECD
2.06
2.99
2.03
38.8
30.3
39.6
EU
2.49
3.57
2.48
38.9
31.4
39.8
Sweden
2.22
5.67
2.72
70.9
51.8
50.9
US
.62
.79
.38
36.8
26.1
39.1
Spending on ALMP as % of GDP 2000
and as % of LMP
•
•
•
•
•
•
•
•
•
•
US
Denmark
Norway
Sweden
Spain
Poland
Germany
France
Netherlands
EU
of GDP
0.15
1.54
0.77
1.20
0.88
0.54
1.23
1.33
1.57
0.99
of LMP
39.1
34.3
66.8
50.9
39.5
24.0
39.5
41.4
43.1
39.8
• There was a large increase in ALMP in all
EU countries in the 1990s but an even
larger of PLMP
• Expenditure on passive LMPs increases
almost automatically with the
unemployment rate.
• Therefore the ratio of ALMP/all LMP
decreases in a recession. From 1989 to
2000 – across a business cycle- the
increase has been very small.
• Active labour market policies – the
statistical definition includes only those
targeted on specific groups.
• Other policy areas – education, income
taxes, pay-roll taxes, infrastructure,
monetary policies – of course have huge
impact on labour market outcomes also.
• Monitoring of recipients of insurance can
be as important as how the insurance is
constructed. (Work tests, obligation to take
“suitable job”, checks for abuse etc.)
Types of ALMP
• Public employment services and
administration – information and coaching
• Labour market training
• Youth measures
• Subsidised employment
• Measures for the disabled
How to measure the results of ALMP?
• Simple ”before and after” comparisons are not
”all else equal” – participants are selected and
other events occur (like change in UE-rate).
• ”Participants and non-participants before and
after” controls for ”other events” but not for
selection – unless participants are chosen in a
randomised fashion.
• Programmes can have different efficiency in the
long and the short run – it makes a difference for
how long the participants are followed.
• There are direct and indirect (individual and
macro) effects. (Displacement, wage formation).
Measurement issues (cont.)
• Evaluations look only at labour market success – there
are also wider social effects (on drug abuse, physical
and mental health, crime, motivation and selfconfidence).
• Problems of generalisation. The results from a small
scale pilot project may be different from a large scale
implementation. (Ex. the large increase in ALMP in
Sweden in the 1990s.) Also, different groups may be
differently affected.
• In comparison over time, over
regions/municipalities/countries, ”reverse causality” is
a problem.
Methods in studies
• Difference in difference (in difference)
• Experiments with randomised participation
(mostly North American studies).
• Panel data.
• Selection correction.
• Matching by individual characteristics.
• Propensity score matching.
Employment services
• Evaluation shows positive results of
intensified support and coaching services
by ES, and of bonuses, particularly if
combined with monitoring/work tests.
Helps most categories of unemployed.
(Old Sw. Example: Eskilstuna)
• But shorter UE can have a cost in terms of
quality of post-UE job.
Ex. of bonuses: The Indiana project
• Three groups:
• Control group – UE 18.3 weeks on
average
• Group who got $500 if they found a job
within 11 weeks – UE 17.0 weeks on
average
• Group who could offer employer $500
subsidy – average UE 17.7 weeks
Labour market training
• Efficiency depends very much on context:
–
–
–
–
Scale
Content – LM relevance and ”quality signal”
Motivation (not just to re-qualify for insurance).
Type of UE - works better against structural than
cyclical unemployment. (Sweden 1970/90s)
– Which unemployed – US results better for women
than for men, poor for ”disadvantaged youth”.
– Sweden in 70s: positive effect on exit, but training
also takes time…
– Sweden: 1990s no displacement effects (unlike
subsidies) but rather small employment effects, at
least in the short run.
Training programs in a model with
minimum wages
• Assume:
– There are two groups of workers, high skilled
and low skilled.
– Market clearing wages for high skilled.
– A minimum wage which is not market clearing
for low skilled  UE
– If training changes some low skilled to high
skilled there is an addition to production with
no loss (since the low skilled were
unemployed).
Subsidised employment
• Subsidies for employers who hire
unemployed persons.
• Subsidised work in public or non-profit
sector
• Subsidies (and training) for unemployed
who want to start their own enterprise
Subsidies to employers:
• Some good results, particularly for target groups
like long-term unemployed.
• But they also have displacement effects.
• Some have high displacement effects but a 50%
displacement effect still means a 50% increase
in employment.
• Swedish studies found better results for support
for self-employment than subsidies for (waged)
employment.
• Results of subsidies for employing youth in
1990s weak, a lot of displacement.
Measures for the disabled
• Include
– subsidies to employers in the ”open” labour
market (”lönebidrag”, 1.3% of the LF).
Combined with plans to phase out the
subsidy.
– Sheltered employment (Samhall). Some exit
to regular LM (5%/year).