Active Labor Market Programs: Potential and Limitations for Breaking the Dependency Cycle in Central and Eastern Europe Michal Rutkowski Sector Manager, Social Protection Europe and Central Asia Region The World Bank Budapest, June 30, 2003

2 Three Main Messages Favorable investment climate is key for job creation Active labor market programs (ALMPs) can not substitute for an enabling business environment and cannot create jobs If properly designed, ALMPs can help to improve labor market chances of disadvantaged workers

3 ALMPs: Expectations, Potential and Limitations Can help disadvantaged groups find jobs Hardly reduce unemployment Do not to create new jobs or increase employment Are costly while impact is small => low cost-effectiveness

4 Active Labor Market Programs: General Principles Careful targeting is critical for success At most disadvantaged groups (those who are unlikely to find jobs without help) At those who benefit most from the intervention (requires evaluation) Ineffective and very costly if broadly targeted Diminishing returns to scale Programs that are cost-effective on a small scale are often not effective when expanded More effective in buoyant labor markets

5 Employment Subsidies: Principles Targeted at disadvantaged individuals Counterproductive as a means of supporting unviable enterprises Drain on budget High costs of taxation Unsubsidized firms bear the burden Lower production & employment Incentives to stay in/move to the informal sector Distort market competition Unsustainable results

6 Employment Subsidies: Effects In general, small or negligible improvement in job finding probability However, can benefit particular groups Poland: helpful for young persons with low educational attainment unemployed for a short time (net impact of 15 points) But hardly create new jobs or increase employment Substitution effect (eg younger workers substituted for older workers)

7 Training: Principles Demand driven: well identified needs of employers Shortages of specific skills, unfilled vacancies Well identified needs of the unemployed Bridge skill gaps, complement existing skills Performance targets (eg agreed 50% placement rate) supported by incentives Should not be a substitute for education system

8 Training: Effects Generally positive net effect Around 10 points improvement in job finding chances Middle-aged short-term unemployed workers benefit most Training effectiveness depends on initial education but results vary by country Poland: less educated; Hungary: better educated workers benefit most Evaluation necessary for effective targeting and good design for some groups no/negative impact (eg. older workers)

9 Public Works: Principles Geographical targeting Poor & high unemployment regions Wages below market level to encourage self-targeting of the most needy Targeted at low productivity workers Not a way to address unemployment among skilled workers

10 Public Works: Effects Generally negative net impact Participants less likely to find a regular job than non-participants Lock-in effect: participants reduce job search effort Can be effective as income support scheme for low-skilled workers in depressed regions

11 Should Central and Eastern European countries expand ALMPs? Questions to be answered first: Are the fundamentals in place? Is investment climate favorable? Is administrative capacity to run ALMPs in place? Can finance without raising taxes or endangering other priorities? Do expected benefits justify the costs? Can afford intervention with a low rate of return? Do actual benefits match expected ones? => calls for monitoring and evaluation.