Labour market policies and institutions Readings Holmlund Grubbs

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 19 th 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 20 th 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 1990 s 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 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 1990 s 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 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 1990 s. ) 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 1970/90 s) – Which unemployed – US results better for women than for men, poor for ”disadvantaged youth”. – Sweden in 70 s: positive effect on exit, but training also takes time… – Sweden: 1990 s 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 1990 s 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).