Labour Market Policy: State Spends Billions - yet Little Success

Traditional instruments of active labour market policy such as job creation and further education schemes for the jobless that are promoted by the employment offices in order to reintegrate the participants in an employment relationship in the first labour market, are to a large extent ineffective.

In many cases the unemployed actually seem to have higher chances of reemployment if they do not participate in one of the aforementioned schemes. This was found in a study that the Centre for European Economic Research (ZEW), Mannheim, conducted for the Federal Ministry of Finance. Alone in 1999, more than 21 billion DM were once again spent on job-creation schemes and further education even though they proved to be ineffective.

Due to the data situation in Germany, which in most cases allows only the determination of average values for all participants and courses, it is not possible to evaluate whether and to which extent the low efficiency of further education schemes can be attributed to inadequate curriculums. From experience acquired in studies conducted in other countries, one can infer, however, that women benefit more from further education schemes than men, and the short-term unemployed more than the long-term unemployed. Neither do qualification schemes seem to show any effect for unemployed youths. In most cases, such schemes only have positive effects for young participants if they offer, apart from sanctions and control mechanisms, additional incentives to take up regular training or employment.

In general, only persons with very little chances of reemployment can expect an improvement of their future situation on the labour market when participating in a job creation scheme. Unemployed persons with above average reemployment chances are more likely to experience a deterioration of their employment prospects. A possible explanation for this phenomenon is the fact that potential employers see the participation in a job creation scheme as a negative signal. They do not expect unemployed person working within a job creation scheme to develop skills and know-how that correspond to the requirements of private enterprises operating in a market economy. Moreover, empirical findings suggest that participants seek regular employment less intensively while taking part in a job creation or further education scheme. As a result, the majority of participants is once again jobless after the scheme has ended. By participating in job creation schemes and also by attending subsidised further education schemes before the Employment Promotion Act was amended in 1998, the unemployed can renew their entitlement to unemployment benefit. This is likely to reduce incentives to take up regular employment the participants' efforts to seek a new job. This might lead to so-called revolving door effects: after participating in a job creation scheme, the next unemployment phase follows until the unemployed person is once again entitled to participate in such a scheme.

In contrast, less comprehensive programmes such as transitional allowance, assistance for jobless persons setting up their own business, and the so-called non-profit hiring out of employees, a kind of temporary employment so as to reintegrate them in regular employment, have rather positive reemployment effects. Compared to the unemployed, participants in these schemes are more likely to find employment. The negative evaluation of job creation schemes and subsidised further education for individual participants is enforced by the fact that negative, indirect effects are to be expected for other employees. For instance, distortions of competition on the commodity markets resulting from job creation schemes and the redistribution of public funds might eventually crowd out regular employment relationships in other sectors of the market economy. The ZEW's analysis of the effects of active labour market policy in the nineties, which considers these indirect effects at the regional level, thus reveals that job creation schemes actually increased unemployment in West and East Germany. Subsidised further education schemes also were likely to lead to an increased unemployment rate.

Contact

Prof. Dr. Tobias Hagen, E-mail: hagen@zew.de