Sunday, June 17, 2007

Active Labor Market Policies

A common misconception that people have about welfare states, is that they produce high levels of unemployment through their social policies. While comparing the US and France might tell you this. Comparing the US and Sweden won't.

The welfare state does not, in principle, create unemployment. It can however, give the tools to mitigate unemployment. Nonetheless, these are policies that a responsible welfare should enact to keep unemployment figures in check. These are Active Labor Market Policies.

1: Life-Long Learning Policies (LLL's) such as publicly-funded workshops and tranings

2: The trational New-Deal-style expansion of employment within public service, civil service, or public works projects.

3: Job creation or extension subsidies to businesses, such as German employment subsidies, Work-study in the US, or a winter construction subsidy

4: Public job-search services that reduce frictional unemployment.

The main aim of these policies is to get people out of the unemployment pool and into the employed workforce.

Frictional unemployment, unemployment while one is between jobs can best be addressed by job-search services. The point that it takes time to find a job. This is time which could be producing income, and encouraging consumption and growth, which is good for everyone. A policy which reduces this time is needed. This is where job-search service policies can play a role.

Seasonal unemployment usually manifests itself in the winter months and can best be addresse by seasonal winter subsidies, and winter public works, such that unemployment in the winter months is mitigated.

Structural unemployment is more difficult to address in that it is more permanent in nature, and implies that only so many workers are needed. Here is where hiring subsidies in particular can improve the situation, while creating the right incentives, and also creating/improving job competencies and skills.

Overall, it is this third part which is most important given the static and potentially all-encompasing nature of structural unemployment.

Here is an interesting OECD meta- study on the Matter. It also lists different sorts of ALMP and presents study results on the effectiveness of individual policies. The study does remind us however that ALMPs are fundamentally supply-side policies, which require well-developed labor-market demand (and demand-side policies) to work well. In any case they make nice alternate policies when it comes to debating supply-side policies of wage-cutting and making lay-offs easier. Enjoy

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