Active employment policies: are training and employment-related subsidies effective in helping the unemployed return to work?

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Maria Gutiérrez-Domènech
September 9th, 2015

Finding a job is a slow and difficult task. And this understandably becomes even more complicated in times of crisis. Whereas the average length of unemployment in OECD countries was 7.9 months in 2007, by 2013 it had shot up to 10.8 months, just as Europe was falling back into recession. Can governments do anything to improve the ability of their unemployed to find a job (in other words, their employability)? The basic idea is that, since the employability ultimately depends on the human capital of the unemployed person, economic policies should be targeted to increase this capital. Such measures, known generically as active policies, are usually of two types: firstly, those that directly affect the quality of the labour supply and, secondly, those that affect the demand for labour. The typical tool for the first area is training while employment subsidies are used for the second. We shall now look at these in more detail.

As a means of aligning the human capital of unemployed people with companies' requirements, training is usually either generalist (as in training in languages, information technologies or basic studies) or with a more specialised focus (as in the case of advanced software training). Training is also supplied in different ways depending on the degree of collaboration with companies, the individual's freedom of choice (for example the use of training vouchers to choose a training programme that best matches an individual's preference) and the type of supplier (private or public provider). Lastly, we should also note that, due to their very nature, many of these actions are designed to meet the needs of the long-term unemployed, the group which tends to decapitalise to a greater extent.

On the other hand, employment subsidies aim to encourage the recruitment of workers, stopping them from remaining outside the labour market for too long and thereby avoiding their decapitalisation. Two of the most frequent methods used are a reduction in Social Security contributions and encouraging entrepreneurship via, for instance, tax reductions or advice in the initial stages of a start-up.

In short, the arsenal of active policies comprises two broad strategic lines: direct impact on the quality of the labour supply via training programmes or on demand via employment incentives. But which strategy is the most effective? The answer to this question is far from simple as, very often, the large number of analyses available cannot be compared with each other. However, a few general conclusions are starting to appear thanks to growing empirical evidence.1 One initial key question is which type of programme is most effective. The data point to guidance and training programmes being useful although the results regarding private employment subsidies are not conclusive: some studies confirm their effectiveness but others are not so clear-cut. The outcome is more negative for programmes that directly create public employment. A second fundamental question concerns whether the design of a programme per se is more important than the environment's characteristics (the point in the economic cycle, labour market institutions, etc.). The evidence appears to support the idea that the type of programme is key to its effectiveness.

One beneficial option would therefore be to prioritise training for the unemployed within active policies, but what detailed recommendations can be deduced from the existing evidence? The analyses seem to suggest that more specific and longer-term training programmes significantly improve employability while short programmes that teach generalist skills do not seem to be very useful, although some differences may arise depending on the people receiving such training.2 The method used to give training is also a determining factor. In some countries unemployed people are given vouchers that can be exchanged for training programmes, increasing their freedom of choice (and, by extension, their motivation) and forcing the institutions providing the training programmes to make more of an effort to attract students.3 In other countries there is closer collaboration with companies, which seems to have had a positive impact on employability.4

So far we have looked at the effectiveness of active policies in employability terms but it is obvious that such an analysis is partial since it does not take into account the costs incurred by the administration. This is particularly relevant in direct subsidies for private employment. Empirical evidence suggests that these programmes can help to boost employment but that, in addition to direct monetary costs, they also have very high indirect costs known as «dead weight», since some subsidies are given for new employees who would have been hired anyway. Estimates of the extent of this dead weight vary greatly depending on each programme's design and country but they generally amount to between 20% and 60% of the monetary cost. If this circumstance is not taken into account, the positive impact of such aid is overestimated. For this reason employment subsidies should only be given to groups with great difficulty in finding employment, such as the long-term unemployed or those aged over 45.5

A review of active policies is therefore incomplete if it does not include the relative weight of such estimates. The amount of public funds allocated to active policies is considerable (0.56% of GDP for OECD countries as a whole in 2013) and, consequently, so is the opportunity cost of not using these resources optimally. A complete evaluation of any measure should therefore also include a cost-benefit analysis. Ideally this analysis should also be carried out based on the findings of a smaller scale pilot study. In this way, only those measures confirmed as valuable by a pilot study would be rolled out. The countries in the north and centre of Europe have a long tradition of trying out policies before implementing these nationally in order to verify whether, a priori, they are really worth the investment. A highly illustrative example of this practice can be read in Messer and Wolfer (2009).6 Specifically, the authors analyse the effects of introducing a voucher for adult training in Switzerland based on an experiment in which one group of people benefitted from this measure while another did not. The results showed a significant increase in participation in training programmes although they also revealed that a large number of individuals would have sought training anyway without the voucher (another example of dead weight). Thanks to this study, the Swiss government now has more information to decide whether to extend this measure to the whole country.

In short, active policies must form an integral part of any strategy to combat unemployment that aims to achieve permanent results. Such policies are neither easy to design nor cheap to implement and, consequently, sharing and adapting best practices should be a basic requirement in any country. We have seen that employment incentives can increase employability but entail a large dead weight and should therefore be focused on those people with the greatest difficulty in finding a job. Fortunately the effectiveness of training in terms of improved employability is clearer and the results are relatively independent to the institutional and cyclical context. This suggests that replicating what works best in other economies is a promising approach. Given the potential of active policies, the results that can be expected if this area is improved more than justify reproducing the innovative measures being employed by many European countries.

Maria Gutiérrez-Domènech
Macroeconomics Unit, Strategic Planning and Research Department, CaixaBank

1. Kluve, J. (2010), «The Effectiveness of European Active Labor Market Programs», Labour Economics, 17: 904-918, and Card, D., Kluve, J. and Weber, A. (2009), «Active Labour Market Policy Evaluations – a Meta-analysis», Ruhr Economic Papers (86).

2. See, for example, Arellano, A. (2010), «Do Training Programmes get the unemployed back to work? A Look at the Spanish Experience», Revista de economía aplicada, 53(18): 39-65. Similarly, Arellano, A. (2005), «Evaluating the effects of labour market reforms at the margin on unemployment and employmnet stability: the Spanish Case», WP 05-12, Economic Series, Universidad Carlos III.

3. See Box 3.7 de «OECD Employment Outlook (2015)».

4. Ekspertgruppen (2014), «New Paths Towards Job – For Citizens on the Margins of the Labour Market».

5. For a summary of the methodologies used in evaluating active policies, see De la Rica, S. (2015), «Políticas activas de empleo: una panorámica», Fedea Policy Papers – 2015/01.

6. Messer, D. and Wolfer, S. C. (2009), «Money Matters – Evidence from a Large-Scale Randomized Field Experiment with Vouchers for Adult Training», CESIFO WORKING PAPER No. 2548.

Maria Gutiérrez-Domènech