What They Can and Cannot Do: An Active Labor Market and Social Policy Reality Check

Labor intermediation/employment services are considered one of a set of “active” labor market policies a country can employ. Their principal objective is to increase employment or income or productivity on the job. “Passive” labor market policies are essentially income supports when a person is outside of employment, with unemployment insurance as the principal policy. Early retirement and severance payments are also passive labor market policies. Protecting incomes is important, as it enables someone to look for a better job, maintains family incomes, and keeps communities viable in crisis times.

Labor intermediation services, or what used to be called employment services, comprise one of three principal active labor market policy instruments. They began in some European countries after WWI, but active labor market policies in the developed countries really took off in the 1960s. As we have amply explained, their purpose is to enable job seekers to find a job faster and more quickly than they would without any formal policy or services. One can see that their principal impact is short-term - shortening the time of unemployment or between jobs, improving the match with the next job.

Training - the second and most well-known active labor market policy - has a different purpose. It is supposed to help improve the skills of workers, some for basic job skills, and some being highly technical that takes a long time. It can be of very varied duration and cost, with the most effective forms conducted in the workplace. Apprenticeship is a form of longer-term training getting a lot of popular press, but its best results are in business cultures with traditions of such investments, such as Germany and Austria. Training has been found to have little impact in the short term, but better results in the medium term.10 It is far more expensive per individual than employment/labor intermediation services, so key aspects to keep in mind are that it matters how effective the training is, whether it is training for a real job, and whether the benefits justify the costs. Given these key differences in costs and impacts, the diagnosis given to an individual job seeker’s employment profile by a labor intermediation service is critical. If they have the skill set for immediate job placement that should be the primary intervention, with the labor intermediation service possibly helping to guide medium-term training and career development. But clearly, for other individuals not job-ready, referral to training, back to education or another instrument is more appropriate. The distinct active labor market policies should be understood to work better for distinct types of labor market problems (see Table 2.2).

A third active labor market policy is wage subsidies. These are essentially partial subsidies to induce employers to take on a certain worker who will hopefully be hired at the end of the period. Wage subsidies are often used to give short-term incentives for hiring disadvantaged workers (e.g. persons with disabilities), incentives during economic downturns when firms are not hiring and unemployment is high, or incentives to locate or hire workers in poor areas.11 Wage subsidies can be effective if used very judiciously, but they are expensive to employ if the job seeker could get a job without their wage being subsidized. Wage subsidies have also been modified to cover on-the-job training periods - the initial months when a worker is being trained on the job before they are fully productive.

Two other types of policies have been considered, at times, in the active labor market policy basket: temporary employment programs and small business development. Temporary employment programs have a record in both Latin America and East Asia, albeit not a particularly successful one, as a post-crisis labor market policy. These are temporary jobs (typically of two to six months), either paid (by the government) employment in a private firm or in a community job (e.g. street cleaning). While these policies are helpful to diffuse a local employment crisis, as in Haiti after the 2010 earthquake or Indonesia in financial crisis, they do not have a good record of being valued in the labor market after the temporary job ends. Such policies play a more important social and political role quite distinct

Table 2.2 Tailoring active labor market programs to labor market needs

Labor market needs or problem

Program types

Special targeting

Moderate cyclical downturns

Direct job creation (e.g., public works)

Wage subsidies

Training (subsidies or grants to workers or employers) Self-employment support

Vulnerable groups (with least resiliency)

Hard-hit regions and industries

Reduce structural imbalances

Employment services (e.g. information, search assistance, relocation assistance)

Training Wage subsidies

Proximate regions, industries, or occupations

Improve general labor market functioning

Employment services Training (e.g. apprenticeship, school-to-work transition)


Enhance skills and productivity

Training and retraining (including in-firm, apprenticeship)

At risk or disadvantaged worker categories (especially for retraining)

Support disadvantaged or at-risk workers

Employment services (counseling, job search assistance)

Training (e.g. grants, subsidies) Wage subsidies

At-risk or disadvantaged worker categories

Source: Adapted from Gordon Betcherman et al., Active Labor Market Programs: Policy Issues for East Asia, 2000.

from the labor market speed/better efficiency role of labor intermediation services.

A quick summary of the appropriate uses of labor intermediation services versus other types of labor market policies is provided in Table 2.2. This is based on impact evaluations and other evidence. It is very important to see such services as better adapted for only certain types of employment needs and to look at their ability to refer workers to a more effective intervention for other labor market needs. There are many barriers to employment in the developing world. Applying the right instrument(s) to the right problem at a sustainable cost requires constant tinkering and rethinking, adjusting to changing local employment conditions.

By improving the speed and quality of job matches, intermediation services are best designed (Table 2.2) for reducing structural imbalances

(by shortening unemployment spells, reducing underemployment, reducing job turnover) and improving general market functioning (via better information, less discriminatory hiring, on-the-job productivity). Since they do not change the educational or job qualifications of a worker, employment or intermediation services would not be particularly effective in delivering new skills for workers not ready for employment (although they can screen and refer job seekers). Nor can they overcome more entrenched social barriers to job entry, such as alcoholism or child care responsibilities. However, they can serve to better identify and screen for these barriers so that the job seeker may ultimately be employed. Here we see the complementary role of training as well as social policy interventions to address the specific employment barriers faced by workers.

Employment/labor intermediation services cannot place workers into non-existent jobs or create employment. They may, however, have distinct roles in times of high unemployment as a platform for other active labor market policies. Ironically, it is often an employment crisis which has fueled national investment in employment services, such as in Korea and Mexico, which were able to rebalance service delivery in better employment times.

Active and passive labor market policies should not be viewed as two isolated camps; the best types are highly complementary. We discussed earlier how labor intermediation services can work with unemployment insurance; in fact, most OECD (Organization of Economic Cooperation and Development) countries require some form of linkage between these two types of policies as there is an increasing concern about getting the long-term unemployed “activated” into the labor market. In most OECD nations, passive and active measures have been developed simultaneously, if not passive measures first. Passive measures, by and large, are more costly and, in recent decades, most OECD nations have moved to emphasize active over passive measures. Of the 24 OECD countries submitting spending data, only 5 - Denmark, the Czech Republic, Hungary, Norway and Sweden - spent more on active measures.12 Developing countries, if one is to generalize, have invested first in active labor market policies, often training and vocational education systems, where poor quality and lack of connection to private sector demand is more the rule than the exception. Passive policies, largely unemployment insurance systems, are far more recent, but are generally more limited in coverage in the developing world, with important exceptions in Eastern Europe and middle- income countries, such as Chile and the Caribbean. One can argue that severance payments have been legally mandated in many developing countries, but these apply only to formal work and are paid by the employing firm with no government financing or insurance. Severance payments have such a spotty record of being paid in developing countries that they do not serve as an income support policy, particularly for the lower end of the labor force. In relation to labor market intermediation services, passive income supports, whether unemployment insurance or cash transfer assistance, should be looked at for their tighter connection to more effective job search. This is especially true for developing countries where drawing on scarce fiscal resources and using worker-firm contributory schemes have great trade-offs. Any passive program, however modest, should learn from the mistakes of many OECD nations which felt UI had become too generous and less of a mechanism to facilitate good re-entry into the labor market.

The direct effect of all active labor market policies on employment, unemployment and earnings has been summarized by Calmfours as threefold, the first aspect of which is directly related to employment services: (1) improved job matching; (2) increased and enhanced labor supply; and, (3) increased labor demand.13 Any deadweight effects, those going to individuals who would have succeeded to the same extent without the intervention, lower the cost-benefit of active labor market policies.

It is also important to remember that employment services and their more advanced cousin, labor intermediation services, operate within given national policy contexts, business environments and labor regulations (e.g. on hiring and firing). Active labor market policies can complement but cannot overcome particularly restrictive regulations on hiring, firing and benefit levels. One of the few studies to have reviewed both labor policy and employment service effectiveness found, on labor policies, a negative correlation only on one type of labor regulation - the strictness of dismissal protection legislation. This study found the impact was on employment probability, that is, firms being less willing to hire formally if it is very difficult to dismiss the worker.14 Suffice to say, among the limitations to getting formal jobs openly listed is a regulatory environment that heavily disadvantages new hires. Similarly, high labor taxes can also discourage employment as in the countries of Eastern Europe and Central Asia, notably Montenegro, Macedonia and Serbia.15 In short, except for the narrow area of dismissal legislation and even here this correlation was not strongly negative, employment services were found to have positive impacts despite very different labor policy contexts.

Some final evidence on active labor market policies. The overwhelming majority of impact evaluations on active labor market policies that examine employment services measure the impact at the individual level: higher numbers of individuals getting jobs faster using services than without them. As in overall labor market analysis, less is known about the macro or general equilibrium effects in terms of reducing national unemployment or underemployment. Dan Finn, summarizing OECD evidence for the developing countries of Latin America and the Caribbean, found macroeconomic impacts such that employment increased and unemployment fell more quickly in those countries that had redesigned their active labor market policies including public employment services within a comprehensive activation - or job-linkage - strategy.16 He argues that earlier US and European reforms aimed at “broadening coverage, tightening eligibility, increasing conditionality and making work pay” increased the effectiveness of the emergency measures taken to deal with the shocks of economic crisis. Finally, the international literature, which records consistently positive findings on labor intermediation, seldom argues for the wholesale jettisoning of other active labor market measures in favor of services and sanctions. Rather, they indicate that employment services would be particularly useful in reducing short-term unemployment and in adapting to economic crises working in a complementary fashion with other active labor market policies. They also point out that, while large-scale training and temporary employment were less effective active labor market policies, there was evidence that design features and targeting were key to more positive results for medium-term employment even in these two labor market policies.

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