Better together: Active and passive labor market policies in developed and developing economies

Abstract

We investigate the macroeconomic impact of public expenditure in active labor market policies (ALMPs) and passive labor market policies (PLMPs) on main employment indicators (i.e., unemployment, employment, and labor force participation) for a large and novel panel database of 121 countries (36 developed, 64 emerging and 21 developing economies). Compared to previous studies, we include for the first time evidence from developing and emerging economies and explicitly examine the possible presence of complementarities between active and passive policies. We find that the interaction between interventions is crucial, as the effect of spending in either of the two policies is more favorable the more is spent on the other. Even the detrimental labor market effects of passive policies disappear on the condition that sufficient amounts are spent on active interventions. This complementarity seems even more important for emerging and developing economies.

Unemployment Benefits, Active Labor Market Policies, and Labor Market Outcomes: Evidence from New Global Data

“…Among the few macro-level studies, Graversen and Van Ours (2008) find that in Denmark, intensive contacts between unemployed individuals and PES decreased the duration of unemployment for participants and increased their rate of finding a job. Pignatti and Van Belle (2018) demonstrate that in developed countries, public spending on passive policies can reduce unemployment and increase the employment rate if there is sufficient spending in ALMP. However, in emerging and developing economies this complementary becomes negative.…”

“…To the best of our knowledge, Pignatti and Van Belle (2018) is the only other study that uses data from both developed and developing economies, covering 121 countries, to analyze the impact of public expenditure on ALMP and passive labor market policies (PLMP) on unemployment, employment, and labor force participation. 3 The authors find that when analyzed separately, ALMP have a positive and PLMP have a negative effect on labor market outcomes.…”

“…Unlike the work of Pignatti and Van Belle (2018), this study covers a larger number of developing and developed countries, with data collected at the same time and with the same methodology across all economies. In addition to employment and unemployment, it also investigates the interlinkages between UB and ALMP and productivity and incorporates an interaction term between income categories of countries and UB and ALMP indicators to evaluate whether these policies interact differently with labor market outcomes at different income levels.…”

Why should we integrate income and employment support?

“…Integrated approaches are also shaped by whether sufficient resources are invested in each of the two main policy components (income support and active support). As shown by macro-econometric analyses, in most countries current investments are below what is required for optimal implementation (Pignatti and Van Belle 2018). The need for sufficient financial investment is a major structural challenge outside of high-income countries (Samans 2021).…”

2 Employment and social trends by region

“…In the recovery phase, labour market (re) activation will be key for the region, through extending ALMPs to groups marginally attached to the labour market, and particularly to NEET youth. The policy mix required will depend on the country context and should take into account the advantages and disadvantages of various policies, and these policies' interactions with passive labour market policies (see, for example, Brown and Koettl 2015;Pignatti and Van Belle 2018) Note: ALMP spending per unemployed person, as a percentage of per capita GDP, is used as a proxy for ALMP capacity. Spending on placement and related services per unemployed person, as a percentage of per capita GDP, is used as a proxy for PES capacity.…”