ALMP: The Path to Less Unemployment

- This piece is dedicated to my American readership. Presented here are the sorts of thing I came to Europe to learn about - 
http://www.tinbergen.nl/cost/london/kluve.pdf

Because unemployment levels have been in the news on both sides of the Atlantic since the crisis began, a lot has been said on what to do about it. This is the case on both ends of the political spectrum. Unfortunately, unemployment is used as a justification by right-wing politicians in all countries to do some pretty nasty policies which have the final effect of redistributing wealth upwards to the richest few percent of the population. Basically, those of us who live in the 99% should be worried that we are constantly about to be made worse-off by spending-cuts, tax-cuts, wage cuts to "restore competitivity" and legalized union busting.

What we need are policies designed to actually make the labor force more competitive and productive, keeping people on the job as much as possible. The importance of keeping people in the job cannot be stressed enough. As if the link to consumer spending were not a convincing reason to try to maintain high employment figures (there are plenty who actually think consumer spending of of secondary importance in an economy), there is also the question of  productivity. While, productivity is influenced by how long you have been doing the job, periods of unemployment not only keep productivity from improving, but actually decrease it as well. Put formally:

Marginal Productivity of Labor = F(years of education) + F(years of experience)

In other words, if we aren't targeting one of these two areas, we probably aren't improving productivity.

What are ALMPs?

Active Labor Market Policies are pro-active, pro-worker policies designed to reduce unemployment by improving the productivity of the labor force through either education or job experience.

Examples of ALMPs packages generally include:

• Job search Assistance: This reduces frictional unemployment.

• Life-Long Learning: Specialized labor market training can take both low-skilled forms such as basic computer-literacy courses, as well as high-skilled forms such as foreign language training and sector-specific skill-certification.

• Wage Subsidies to the Private Sector: Under this sort of scheme, part of the employee's wage is paid by the state, making him less expensive to the employer. Such a policy should be used on a temporary and graduated basis in order to discourage employer dependency on such policies. 

• Direct Job Creation in the Public Sector: One of the primary uses of State-Owned Enterprises is to do counter-cyclical policy. For those who think that public-sector job-creation leads to inefficiency, just remember that when we are comparing this policy to persistent unemployment and idle, un-utilized resources, almost any level of output is more productive, especially in the long-term.

Costs
According to the OECD, even the most expensive and most extensive ALMP programs cost less than 1.8% of GDP. In exchange for this miniscule expenditure, the employment effect in the countries on the far left of the graph simply cannot be overlstated.

The RWI / IZA Study

This study, undertaken by the German Institute for the Study of Labor (IZA) is a meta-study, which was meant to study what worked and what didn't across the EU-15 in the early 2000's.

Abstract

Measures of Active Labor Market Policy are widely used in European countries, but despite many econometric evaluation studies no conclusive cross-country evidence exists regarding "what program works for what target group under what (economic and institutional) circumstances?". This paper results from an extensive research project for the European Commission aimed at answering that question using a meta-analytical framework. The empirical results are surprisingly clear-cut: Rather than contextual factors such as labor market institutions or the business cycle, it is almost exclusively the program type that matters for program effectiveness. While direct employment programs in the public sector appear detrimental, wage subsidies and "Services and Sanctions" can be effective in increasing participants' employment probability.

http://www.tinbergen.nl/cost/london/kluve.pdf
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Jochen Kluve is Professor of Empirical Labor Economics at the School of Business and Economics, Humboldt-Universität zu Berlin, and Head of the Berlin Office of RWI.