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1 J Kluve

Successes and Failures of
Labor Market Policy in Europe


Jochen Kluve
(RWI Essen, Germany)


Colombia Employment and Development Conference

Bogot, November 14, 2008
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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 others experience
Europe: many different countries within relatively small space,
many experiences with different labor policies

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3 J Kluve
Todays 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
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4 J Kluve
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5 J Kluve
Unemployment in Europe
Source: Eurostat
0
2
4
6
8
10
12
14
16
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6 J Kluve
Youth unemployment in Europe
Source: Eurostat
0
5
10
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20
25
30
35
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7 J Kluve
Long-term unemployment in Europe
Source: Eurostat
0
2
4
6
8
10
12
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%2005
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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)


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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



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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



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11 J Kluve
EU spending by program type
0
0,05
0,1
0,15
0,2
0,25
0,3
Total LMP
services
Training Job rotation
and job
sharing
Employment
incentives
Integration of
the disabled
Direct job
creation
Start-up
incentives
Source: Eurostat
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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]
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13 J Kluve
Northern
Europe
Western
Europe
Southern Europe
Eastern
Europe
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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
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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
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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
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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
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18 J Kluve
Spending on ALMP in Europe (%GDP)
0
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
1,8
2
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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 , 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)
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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)
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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


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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.

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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.