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Summary Welfare State Economics - Active Labour Market Policies Extra scheme
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Active Labour Market Policies Extra scheme
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ACTIVE LABOUR MARKET POLICIES: ALMPMicro evidence: ALMP instruments show low effects
Macro evidence: countries with high ALMP spending have lower unemployment
- Macro-evidence may suffer from reverse causality
- Character of ALMPs may differ between countries (omitted variable bias)
1. Labour market training
a. Class-room training, on-the-job training, activation
b. Specific or general
c. Enhance worker productivity
d. Effectiveness of programs low and often insignificant
i. Substantial evidence of lock-in effects
ii. Training may be effective for some group but use not well-targeted
1. New deal in NL and UK provided to all unemployed workers
2. Many low-educate workers dislike program participation
iii. Long-term effect more positive, but hard to measure
iv. Costs of training low, so break-even point of benefit savings is low as
well with limited samples, hard to prove significance
2. Private sector incentives/ wage subsidies
a. Basic idea: worker productivity insufficient to earn minimum wage (or social
assistance)
i. Productivity trap
ii. Reservation wage should be lower than minimum for wage subsidy to
work
b. Therefore, use subsidies to bridge the gap
c. Subsidies direct to employers or workers
d. Specific wage subsidies
i. Are instruments Dutch municipalities can use
ii. Optimal in theory (targeting), but how to measure individual earning
capacity?
iii. Earnings potential is measured with error
1. Imperfectly correlated with need of subsidy: deadweight
2. Incentives to set earnings potential low
iv. Therefore, relying on income as a proxy may be second best
deadweight
e. Fiscal wage subsidies, generic measures
i. Earned tax credit (negative tax)
ii. Tax deductions for workers
iii. Wage subsidies for employers with wages close to minimum wage
iv. Wage subsidies are generally effective
v. But they are costly, no ‘free lunch’ that is financed by higher tax
income
1. Like other tax exemptions or subsidies, they have to be paid by
other individuals
2. Subsidies may cause displacement and substitution for other
workers as well
vi. This means that use of wage subsidies is driven by equity motives as
well!
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