Macroeconomic Effects of Active Labour Market Policies

The paper presented in this ZEW Research Seminar evaluates the macroeconomic effects of active labour market policies in Germany over the period 2005 to 2018. The authors propose a novel identification strategy that exploits the imperfect overlap of local labour markets and local employment agencies that decide on the local implementation of policies. Specifically, they instrument for the use of policies in a local labour market with the mix of policies implemented outside this market but in local employment agencies that partially overlap with this market.
The authors find no effects of short-term activation measures and further vocational training on aggregate labour market outcomes. In contrast, wage subsidies substantially increase the share of workers in unsubsidised employment, while lowering long-term unemployment and welfare dependency. Overall, the results point at negative externalities of active labour market policies that partially offset the effects for program participants and that some segments of the labour market benefit more than others.