Table 2 The effectiveness of ALMPs

Incentives for retaining employment

Work sharing/Short work

Reduce outflow from employment

Temporarily prevent layoffs

Substantial deadweight, substitution and displacement effects.

→ Increased LM segmentation

Useful temporarily at beginning of severe recessions

Very costly and potential negative longer-term impacts.

→ Increase in unemployment prone groups, lower productivity

Negative competition, wage effects and no effect on temporary jobs.

→ Inhibits efficient labor reallocations

Needs to be in place before

Only useful for a very limited time for existing schemes at onset of severe recessions

→ Reduced outflow from unemployment

Might obstruct recovery if not phased out swiftly

Wage subsidies

Continued employment of insiders

Locking-In effects, skill acquisition disincentives and retaining low-productivity workers

→ Increased LM persistence, long-term unemployment

Potentially useful temporarily at beginning of severe recessions

Cost-ineffective and potential negative longer-term impacts.

→ Skill attrition, lack of adaption

Might obstruct recovery if not phased out swiftly

Incentives for creating employment

Increase outflow from un-employment

Employment of Outsiders

Substantial deadweight, and displacement effects.

→ Skill attrition, lack of adaption

Negative competition, wage effects

Locking-In effects, skill acquisition disincentives

Hiring subsidies

Very significant transition and screening effects.

Potentially sizeable short-run displacement effects.

→ Cost-effective countercyclical automatic stabilizer to increase outflow from unemployment

Important stabilizer to support recoveries.

Cheapest and most cost-effective measure.

→ Increase of LM flows, reduction of persistence

Competition effects.

Limited deadweight and substitution effects, displacement

→ Strengthen LM attachment

Keep LM attachment in recessions.

As automatic stabilizer: target disadvantaged, especially long-term unemployed worker for limited period.

→ Promote adaptability

Self-employment incentives

Potentially large transition and screening effects.

Potentially high deadweight and displacement effects.

→ Increase of LM flows, reduction of persistence

Support recoveries.

Cost-effective, but restricted applicability

→ Strengthen LM attachment, reducing LTU

Competition effects.

→ Promote adaptability

Incentives for seeking a job and working

In-work benefits and subsidies

Create employment incentives

Positive screening, wage and competition effects.

Substantial deadweight, substitution and displacement.

→ Increased LM persistence, long-term unemployment

Cost-effective redistributive instrument to soften income shortfalls.

Cost-ineffective: costly and no long-run positive employment effects.

Reduce inequality and in-work poverty

Very limited transition effects.

Sizeable skill acquisition disincentives and incentives for low-productivity work.

→ Increase in unemployment prone groups, lower productivity

Temporary use in crises together with demand side policies

Cost-effective redistribution policy in crises, but targeting Issues.

Locking-In and asymmetric information effects

→ Skill attrition, lack of adaption

Public works

No transition effects.

Strong stigmatizing and locking-in effects, skill acquisition disincentives

→ Lower employment probabilities

Temporary safety-net in MICs during crises.

Cost-ineffective: costly and no long-run positive employment effects.

Threat effect. Infrastructure provision, Safety-net

→ Skill attrition, lack of adaption

Employment of last resort in LICs during crises.

Safety-net role in crises

Activation and workfare

Make unemployment more costly

Threat effects and wage effects.

Locking-in effects

→ Increase in employment incentives

No special role during crises, but can support recovery in tandem with demand side policies.

Cost-effective policy in shifting towards active income support.

→ Increase of LM flows, reduction of persistence, shorter unemployment durations

Sanctions

Make unemployment more costly

Threat effects and wage effects.

→ Increase in employment incentives

No special role during crises, but can support recovery in tandem with demand side policies.

Cost-effective policy in shifting towards active income support.

→ Increase of LM flows, reduction of persistence, shorter unemployment durations

Incentives for human capital formation

On-the-job training

Enhance labor supply by adapting and increasing skills

Strong screening, competition and transition effects

Sizeable deadweight costs as well as cream-skiming and locking-in effects.

→ Effective in increasing long-run employability and earnings through skill upgrading

In recessions to counter disadvantages of work sharing schemes, to strengthen LM attachment, and upgrade skills.

On the job-training targeted at long-term unemployed workers are particularly cost-effective in the long-run!

→ Strengthen LM attachment

Classroom training

→ Increase productivity, employability and earnings

Weak screening, competition and transition effects

Small wage effects.

→ Promote adaptability,

Most effective in strengthening recoveries.

Important: training focus, involving employers, providing formal qualifications, targeting.

→ Increase of LM flows, shorter unemployment durations.

Improved labor market matching

Job search assistance

Increase job search and matching efficiency

Competition Effects

Deadweight and cream-skimming effects potentially strong.

→ Increase outflow from unem-ployment, job search incentives,

Strong role in supporting the recovery

Cost-effective policy, essential for LM functioning with short-run impact.

Employer intermediation service

→ Strengthen LM attachment,

Counseling, monitoring

Threat Effects combined with sanctions

Also displacement, wage and churning effects.

→ Increase of LM flows, shorter unemployment durations,

Search assistance: proven strong impacts on employability, esp. for disadvantaged workers.

→ Promote adaptability.