Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

APPENDIX I

The OECD Labor Market Policies Database

The OECD Labor Market Policies database includes expenditures on programs targeted to particular labor market groups, therefore excluding general employment or macroeconomic policies.21 So, some important policies, as nontargeted reductions in taxes and social security contributions, would not be considered expenditures in labor market programs even if they lowered labor costs. The data for ALMPs are broken down into five categories:

  1. Public employment services and administration – It includes placement, counseling, and vocational guidance; job-search courses; support for geographic mobility and similar costs in connection with job-search and placement. It also encompasses overhead costs of labor market and unemployment benefit agencies, and other administrative costs.

  2. Labor market training – It includes measures related to labor market policies that are not targeted to youth or disabled individuals. It is broken down in two parts: (i) training for unemployed adults and those at risk; and (ii) training for employed adults.

  3. Youth measures – It includes only special programs for youth in transition from school to work and is broken down in two parts: (i) measures for unemployed and disadvantaged youth; and (ii) support of apprenticeship and related forms of general youth training.

  4. Subsidized employment – It comprises targeted measures to promote employment for unemployed individuals (other than youth or the disabled) and is broken down in three parts: (i) subsidies to regular employment in the private sector; (ii) support of unemployed persons starting enterprises; and (iii) direct job creation (public or non- profit).

  5. Measures for the disabled – It includes only special programs for the disabled, limited to two types of policies: (i) vocational rehabilitation; and (ii) work for the disabled.

    The identification of the effect of expenditures on these policies will depend on controlling for expenditures in PLMPs to account for the strong positive correlation between them (displayed in Figure 2). The OECD database has information on PLMPs broken down in two categories:

  6. Unemployment compensation – It comprises all forms of cash benefits to compensate for unemployment, except early retirement. In addition to unemployment insurance and assistance, it includes publicly funded redundancy payments and other compensation for jobless workers due to firms permanent or seasonal shutdown.

  7. Early retirement for labor market reasons – It includes special schemes in which retirement pensions are paid to individuals without work or otherwise because of labor market policies. Only subsidized early pensions rather than funded schemes within regular pension plans (e.g., by actuarially calculations of the amounts paid) are taken into consideration.

The strict classification of programs into these categories may leave out key national policies which national researchers could consider important employment programs. Tables I.1 and I.2 below give a detailed breakdown of the active and passive labor market policies included in the data for France for the sake of illustration. The tables show the breadth of the OECD social expenditure data but at the same time reveal the absence of some high-profile policies. Most prominently, the data do not include cuts in social security contributions associated with the 35-hour workweek laws of June 1996 (Loi Robien), June 1998 (Aubry I), and January 2000 (Aubry II) as these were perceived as general labor/macroeconomic policies, instead of targeted labor market programs. Nevertheless, some expenditures on programs linked to work time reorganization are included.

Table I.1.

ALMPs in France Included in the OECD - LMP Database

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Association nationale de gestion du Fonds pour l’insertion professionnelle des handicapés.

Table I.2.

PLMPs in France Included in the OECD - LMP Database

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APPENDIX II

Data Definitions and Sources

Most of the data used to build the variables used in this study came from the OECD Analytical Database (AD), the OECD Expenditure in Labor Market Policies database (LMPD), and the OECD Benefits and Taxes database (BTD).22 Institutional variables either built or made available by Nickell and Nunziata (2001) (NN) were also used.23

Data for the employment rate in the business sector come from the AD. Data for the share of GDP diverted to ALMPs expenditures come from the LMPD. GDP data are an aggregation of quarterly series to match each country’s fiscal year. (All the LMP data are in fiscal-year units.) Business sector wages and the consumer price index were obtained from the OECD – Analytical Database.

Control variables include:

  1. Expenditures on PLMPs (unemployment compensation and early retirement for labor market reasons) from the LMPD are expressed as a percentage of GDP.

  2. Logarithm of per capita GDP in the business sector (in 1995 prices), to provide some country specific time varying measure of the economic conditions in the business sector. Real long-term interest rates were also used but in general were not deemed significant.

  3. Technological growth in the business sector measured as:24
    ΔA=(ΔYαΔL(1α)ΔK)α(0.1)

    Where Y is the GDP, L employment, K capital, and α labors share in income, where all variables are business sector measures (Δ denotes the difference in logs).

  4. Average gross replacement rate during the first year of unemployment from the OECD Benefits and Taxes database. That is a rough approximation for the ratio between unemployment benefits and work income but there are no available time series for net replacement rates.25

  5. Other institutional variables: (i) Union Membership, as a percentage of employees, using data from the OECD webpage. Missing values are replaced by previous year’s value (or the following value when there is no previous value). Alternative measures from NN were used, generating similar results.26 (ii) An index of employment protection made available by NN and originally built by Blanchard and Wolfers (2000).27 (iii) Tax wedge data from the OECD webpage. It includes social security contributions of employees and employees and labor income taxes. Data stopped in 1997 and assumed unchanged between 1998 and 2000. (iv) The second bargaining coordination variable (COW) provided by NN. (v) An index of central bank independence from Debrun (2003). (vi) The index of unemployment benefits duration from NN.

  6. Changes in the size of government might also have an impact on business employment rates. To control for this effect, the share of public sector in total employment is included in the regression.

  7. Degree of economic openness determined by the ratio: (Exports+Imports)/GDP.

  8. Government current receipts as a share of GDP was obtained from OECD-AD.

References

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1

European Department, IMF. Raphael De Coninck provided excellent research assistance and valuable suggestions. Numerous discussions with Luc Everaert and Xavier Debrun helped to sharpen the focus of the argumentation developed in the paper. Frederic Lerais, David Grubb, Eric Dubois, and seminar participants at the French Ministry of Economy at Bercy gave insightful comments. David Grubb and Laura Bardone promptly answered many questions on the OECD data used here. All errors and omissions should be solely attributed to the author.

2

ALMPs consist mainly in training, targeted subsidies to job creation, public employment services and other expenditures aimed at promoting employment. Nontargeted policies to lower labor costs are not included in this definition, as they are considered general macroeconomic policies. That is the case, for instance, of the treatment given by the Organization for Economic Co-operation and Development (OECD) to a large share of the cuts in social security contributions in France in the 1990s.

3

This moderation has been used as one of the main explanatory variables to explain sharp labor market improvements in the Netherlands and Spain, for instance (Blanchard (2000) and Decressin et al (2001), among others). France has also seen structural labor market improvements apparent in shifts of the equilibrium trade-off between unemployment and wages, seemingly originated from moderation of wage demands (Estevão and Nigar, 2002, and Detragiache and Estevão, 2002).

4

An alternative strategy focusing on institutional details, implementation timing, and microeconomic data can provide satisfactory evaluation of specific policies, but cannot answer the question of how effective aggregate expenditures on ALMPs are in increasing aggregate employment, for instance. Heckman et al (1999) provide an overview of the literature using microeconomic data to evaluate a specific ALMP.

5

Most of these factors were outlined in OECD (1993).

6

The literature on the effects of active policies on labor market variables using OECD country level data was initiated by Layard, Nickell and Jackman (1991) and immediately pursued in OECD (1993), Forslund and Krueger (1994) and Heylen (1993).

8

Suppose that ALMP spending had no effect on unemployment: if ALMP spending rises (because of reverse causality) less than proportionally with unemployment, there would be an apparent negative relationship between ALMP spending as a ratio of unemployment, and the unemployment rate.

9

Business sector employment rate is defined as the share of business sector employment in the working-age population. Conversely, reverse causality creates a positive bias in estimates of the effect of ALMPs on the unemployment rate. The OECD Labor Market Policies database is described in Appendix I.

10

For instance, Zetterberg (1993).

11

The effect of ALMPs on labor force participation has been documented in several of these papers. For instance, Bellmann and Jackman (1996), find that ALMPs increase female labor force participation and a positive impact of ALMP on labor force participation is also found in the Swedish literature (see Calmfors et al., 2002), but not in Nickell and Layard (1999). Nickell and Layard (1999) do not find a significant effect of ALMP when they consider employment to population ratios, unlike their findings for the unemployment rate. Bellmann and Jackman (1996) find a significantly negative correlation between employment growth and ALMP, while they find no significant effect on the unemployment rate. Scarpetta (1996) finds stronger and more significant coefficients for ALMP in the non-employment equation (sum of the inactive and the unemployed divided by the working age population).

12

As evidence that the number of “hidden” unemployed workers probably increases with unemployment, Scarpetta (1996) mentions the mostly positive correlation between the unemployment rate and the rate of inflows into ALMP (except in Germany and the Netherlands). Calmfors, Forslund and Hermström (2002) use the results of several papers to compute the effect of program participation on total unemployment, i.e. open unemployment minus program participation. To do so, they use simplifying assumptions about the unemployment rate, the program participation rate, as well as expenditure per program participants as a share of per capita GDP. According to their estimates, though, program participation appears to significantly reduce total unemployment in only three cases: Zetterberg (1993), Wolfers and Blanchard (2000), and Scarpetta (1996) for the non-employment specification.

13

These countries are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Netherlands, Norway, New Zealand, Spain, Sweden, United Kingdom, and United States. The OECD database with expenditures on labor market policies is described in Appendix I.

14

The results reported in this section are broadly unchanged if Feasible GLS is used as the estimation procedure and different assumptions are made about residual serial correlation (whether country specific or not) and heteroscedasticity. OLS results were then selected to be presented for transparency reasons and to facilitate replication by other researchers.

15

Both papers show that the inclusion of Sweden in the sample lower the precision of their estimates, which become significantly different from zero only at the 10 percent level of confidence. Without Sweden, the effect of ALMPs on the unemployment rate (the dependent variable used by them) is much larger and more precisely estimated. Actually, here ALMPs remain a significant explanatory factor of employment improvements in the 1990s in the baseline specification, which includes Sweden.

16

The sign and significance of the coefficients of each ALMP were robust to marginal changes in time periods and specifications but their estimated sizes were more sensitive to these changes than the specifications in Tables 1 to 3.

17

It is also possible that a more complete model would include an equation for expenditures on PLMPs and the specification excluding them from the ALMPs equation would be the right reduced form. Also, a dynamic relationship between PLMP and ALMP disbursements could be biasing the ALMP coefficients in the preferred specification in Table 1. In any case, the still-positive and significant coefficient for ALMPs when PLMPs are excluded (Table 3, column 1) suggests that these potentially important issues are not driving the main result.

18

An index of central bank independence was included as different institutional setups for monetary policy may affect wage bargaining and, therefore, equilibrium employment rates. However, the estimated coefficient for this variable was often insignificantly different from zero. The economic openness indicator captures only a partial equilibrium effect for these developed countries. It disregards the expected positive effect on world GDP of reduced widespread reduction of international trade barriers.

19

Several papers have been written since Blanchflower and Oswald (1994) showing that there may be some variation around the -0.1 estimate. Card (1995), in particular, raises doubts on their basic specification and notices that elasticities for the United States could be smaller than alluded in the book. More recently, Estevão and Nigar (2002) have shown this elasticity to be exactly -0.1 for France using micro data from the French labor force survey and a different methodology. This general result does not seem to be unique to more developed industrial economies: Estevão (2003) estimates, also using micro data and different methods, an elasticity of about the same size (but a bit smaller) for Poland.

20

Calmfors et al (2002) discuss the studies on Sweden. Crépon and Dezplatz (2001) provide strong evidence that about 450,000 jobs were either created or maintained in France between 1994 and 1997 due to reductions in employers’ social security contributions targeted to the hiring of low-skilled workers. These cuts in social security contributions would work the same way to increase employment rates as the employment subsidies discussed in the text.

21

For further information on this database see OECD (1993), Chapter 2, Annex 2.B, and Martin and Grubb (2001).

22

Data for public expenditures on labor market policies, participant inflows and many institutional and labor market variables can be found in: http://www1.oecd.org/scripts/cde/members/LFSDATAAuthenticate.asp. Additional indicators and derived statistics can be found in: http://www1.oecd.org/scripts/cde/members/LFSINDICATORSAuthenticate.asp.

23

Their database goes from 1960 to 1995. Debrun (2003) extends part of the data up to 1998 and kindly provided the database. When used here, institutional data from Nickell and Nunziata (2001) for 1999 and 2000 are assumed to be constant at their 1998 level.

24

This variable is equivalent to the traditional Solow residual adjusted for the elasticity of labor in the production function. It is a proxy for labor-augmenting (Harrod neutral technical) progress to allow for balanced growth in a dynamic setup. The measure proposed here is a proxy for this variable and has also been used in Blanchard (1997), Blanchard and Wolfers (2000), Estevão and Nigar (2002), and Estevão (2003).

25

The average replacement rate computed by the OECD is not a very attractive measure, since it gives equal weight to replacements rates in year 1, in year 2-3, and 4-5. Alternative specifications use the average in the second and third years, as well as the overall OECD measure. All these measures are only available for every other year, and average of adjacent years were used to complete missing observations.

26

Collective agreement coverage, which is the share of employees covered by a collective agreement, was also used in some specifications. This variable is available for 1980, 1990 and 1994 (for 1985–89, the average of 1980 and 1990 was used; for 1990–93, the 1990 value was used; for 1994–2000, the 1994 value was used).

27

Other specifications including a breakdown of the employment protection index, also broken down between regular and temporary employment protection indices were also tried. Measures of employment protection were available for 2 periods: late 1980’s and late 1990’s (the average of the two measures were used for 1990–94).

Do Active Labor Market Policies Increase Employment?
Author: Mr. Marcello M. Estevão