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Description
This paper examines compulsion in active labour market programmes (ALMP). When an unemployed worker has to participate in a programme in order to remain eligible for benefits there are two separate effects. First, there is the treatment effect, i.e. the programme makes the worker more attractive for a potential employer or makes search more efficient, thus helping the unemployed worker to find a job more quickly. Second, there is the compulsion effect, i.e. because the worker has to attend the programme his value of being unemployed drops and he is stimulated to find a job more quickly. So, both effects induce the worker to find a job more quickly. The difference between the treatment effect and the compulsion effect concerns the quality of the post-unemployment job. The treatment effect improves the quality; the compulsion effect lowers the quality of post-unemployment jobs.
Keywords: Compulsion; active labour market policies
JEL Classifications: J64; J68
I. Introduction
Recent surveys of the effectiveness of active labour market policies indicate that the majority of the programmes have at most limited effects. Kluve and Schmidt (2002) survey about 50 recent evaluation studies to conclude that programmes with a large training content are most likely to improve employment probabilities. Furthermore, both direct job creation and employment subsidies in the public sector almost always fail. Kluve (2006) follows up on this and presents an analysis of about 100 evaluation studies of active labour market programmes in Europe, most of them operating after 1990. He finds that the effectiveness of programmes is quite independent of contextual factors such as labour market institutions and macroeconomic environment. Training programmes appear to have at most a modest effect on transitions from unemployment to work. Direct employment programmes in the public sector are rarely effective and frequently detrimental for the employment prospects of participants. A rational unemployed worker reading the evaluation literature might be tempted to take the results at face value and hence decide that it is better not to attend a training programme. However, both Kluve and Schmidt (2002) and Kluve (2006) conclude that providing job search assistance and counselling and monitoring accompanied by appropriate sanctions for non-compliance are effective and they are often found to be cost-effective because of their rather inexpensive nature. So, the rational unemployed worker may conclude that it is beneficial to attend a job search assistance programme.
But, of course, it may be that it is not the job search assistance itself that speeds up job finding. Instead, it could be the monitoring that is an indistinguishable part of job search assistance which forces the unemployed to search more intensively. Perhaps it is this compulsory element of the job search programme that is driving the result.
This paper discusses compulsion in active labour market programmes. It does not provide new empirical evidence. The aim is to present and discuss in a systematic way how compulsory elements in ALMPs affect the behaviour of unemployed workers. To structure the discussion a simple search-matching model is presented that distinguishes between a treatment effect and a compulsion effect. Compulsion in labour market programmes is not the exclusive domain of active labour market policies. Also, in the provision of benefits there are compulsory elements. For example, when unemployment insurance benefits expire, an unemployed worker faces a drop in income either because after expiry of the benefit he is not entitled to any benefit or because he will receive a lower unemployment assistance benefit. To avoid this drop in income he is forced to find and accept a job offer. Another element of compulsion in unemployment insurance refers to the eligibility criteria. In order to remain entitled to unemployment insurance benefits, the worker has to fulfil certain duties like looking for a job, accepting suitable job offers and so on. If the worker fails to do so he may be punished, have a benefit sanction imposed and face a lower benefit for some time. So, compulsion arises from the financial consequences of not behaving according to certain rules. Compulsion is not synonymous with coercion. Unemployed workers always have the opportunity of refusing to look for suitable jobs and letting benefits expire. However, if they do so they face a penalty because they may lose their benefits. This is also how compulsion in ALMPs works. Workers can refuse to attend a programme even if it is thought to be beneficial for them but, if they do so, they run the risk of losing their benefits.
The paper is set out as follows. In the next section a simple search-matching model is presented to illustrate how ALMP affect the functioning of labour markets. The basic assumption in the theoretical model is that ALMPs have two different types of effects. First, they may have a treatment effect, i.e. they may be beneficial to the unemployed worker in terms of the speed of job finding. Secondly, they may have a compulsory element, which also speeds up job finding but has negative effects on the quality of post-unemployment jobs. The differences between the two types of effects are illustrated by showing the results of simulation exercises. Section 3 gives an overview of empirical studies, which are grouped into three categories: on unemployment insurance benefits--in particular potential benefit durations--on benefit sanctions and on ALMPs with a compulsory element. Unemployment insurance benefits and benefit sanctions do not have any treatment effects but their effects on behaviour show to what extent compulsion effects affect the labour market. ALMPs often have a combination of treatment effect and compulsion effect. Many studies on job search assistance --counselling and monitoring--show that compulsion effects are very important even to the extent that they may be more important than the treatment effects. Section 4 concludes.
2. Compulsion--theoretical framework
2.1 A search-matching model (1)
To illustrate how compulsion in ALMPs affects labour market behaviour of the unemployed and thus the functioning of the labour market a simplified search-matching model of the labour market is used. The compulsion effect is considered to be identical to a decrease in the utility of unemployment; the treatment effect is equivalent to an increase in search effectiveness (the probability of getting a job offer conditional on a contact). So the compulsion effect will increase the search intensity while the treatment effect will increase the acceptance probability because it makes the worker more attractive for a potential employer or makes search more efficient, i.e. less costly. The two effects are observationally equivalent but may have different implications.
Workers are assumed to be risk-neutral and cannot save; hence they consume all their income each period. This assumption rules out the possibility that agents save to insure themselves against the loss of income due to unemployment. Once a worker becomes unemployed, he receives an unemployment benefit that is constant over the unemployment spell. For simplicity it is assumed that labour is homogeneous, i.e. all jobs offer the same wage w net of taxes while unemployed workers receive unemployment benefits bw, with b [member of] (0,1) being the replacement rate. Unemployed workers are looking for job offers and as soon as they get one they will accept it. Thus the unemployed have only one instrument of search, their search intensity. An unemployed worker is assumed to search for a job with search intensity s [greater than or equal to] 0. The disutility of searching at intensity s equals [gamma] (s), such that [gamma] (s) = 1/2 [gamma] [s.sup.2] with [gamma] > 0. So the disutility of search increases with the search intensity with an increasing marginal disutility. The search for jobs generates a flow of job offers, which follows a Poisson process with arrival rate [mu]s. The arrival rate consists of two parts, [mu] which is determined by the state of the labour market, i.e. the number of vacancies and unemployed, and s which is determined by optimising the behaviour of the unemployed worker. To illustrate the effects of compulsion in ALMPs it is assumed that all unemployed workers have to attend a job search assistance programme that lasts from the beginning of the unemployment spell until the worker finds a job. The job search programme affects the unemployed worker in two ways. First, learning increases the effectiveness of search and the job search programme reduces his search costs with a fraction [sigma] [member of] (0,1). Second, the job search programme reduces the utility derived from the flow... |
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