In the late 1940s, Gösta Rehn and Rudolf Meidner, two Swedish trade economists, had a dream: they envisaged the government providing retraining to all workers laid off in low-growth industries. Retraining would shift these workers from dead-end jobs to high-growth industries. They also envisaged government clerks directly creating jobs, which would be offered to the long-term unemployed.
The active labour market policy (ALMP) vision was successfully communicated. Sweden set up one of the most comprehensive programmes. In 2000, it spent almost 3% of its gross domestic product (GDP) on ALMPs, about 20 times more than the US. In the early 1990s, the Organisation for Economic Co-operation and Development (OECD) recommended that all member states set up comprehensive ALMP programmes. Now, the average member state spends about 1% of GDP on ALMPs.
Do these policies succeed in placing the unemployed into jobs? A recent OECD study finds some programmes have been effective but others have yielded low or even negative rates of return and have had little success in helping unemployed people to get permanent jobs. More recently, our own analysis of the Swiss ALMP system finds that Swiss policies for the unemployed are ineffective in placing jobseekers into regular jobs. So, should we abolish ALMPs? As participants are disregarded in the official unemployment figures, cynics argue that governments will not abolish the programmes because they allow them to reduce the numbers on the dole.
Arguing the case
We believe that there are at least two more substantive reasons why abolishing ALMPs is not yet warranted. First, evaluation studies have not yet systematically studied medium- term effects such as the impact of training on the quality of new jobs. Preliminary evidence for German programmes shows that medium-term effects are better than short-term effects. Second, even programmes that turn out to be ineffective at placing people into jobs may curb unemployment. Job seekers who recognise that they face being sent to a time-consuming training or employment programme may search for regular jobs more actively. We find that ALMPs may have been reducing Swiss unemployment by about 10%.
A new Danish activation programme requires job seekers to participate in whole programme sequences, requiring frequent meetings with their caseworkers. This embodies one of the three pillars of the Danish ‘flexicurity’ model: the ‘right-and-duty principle’. Job seekers have the right to receive assistance but also a duty to participate in meetings with the caseworker and to attend ALMP programmes.
The central result of the official randomised evaluation is that activation works. The Danish programme decreases unemployment duration by about 2.5 weeks – a huge effect considering that it typically takes 14 weeks to locate a regular job. Similar activation programmes are found in most Anglo-Saxon countries. The 1995 US welfare reform was based on this principle. The UK’s New Deal for Young People entails intensive counselling, training, and employment programme provision. Generally, these activation programmes all appear to place job seekers into regular jobs quickly.
Why do activation programmes succeed where policies without an activation programme have failed? First, activation policies work with a reduced set of ALMPs. Rather than offering substantial retraining, activation policies merely aim to locate key problems in job-search strategies and develop appropriate strategies to remedy these problems. Second, activation strategies embed ALMPs to a tightly-planned sequence of personal meetings. This allows caseworkers to tailor programmes to a job seeker’s needs and to monitor adherence with job-search requirements.
The Swedish ‘dream’ may not be so misleading now that we have learned that being active does not mean spending money on programmes to reduce numbers on the dole.
Rafael Lalive is professor of micro-econometrics at the University of Lausanne, Jan van Ours is professor of labour economics at University of Tilburg and Josef Zweimüller is a professor of macroeconomics and labour economics at University of Zurich.
