Labour market policy spending in the EU: re‐assessment from a social investment perspective (RE-InVEST Working Paper Series D5.2)

Along our observation period from 2006 to 2015, the trend in many European countries is the combina­tion of rising labour market policy (LMP) spending on aggregate and declining spending per person want­ing to work. This means that even though the public faced an increased cost of LMP, the resources chan­nelled to the individual job seeker shrunk on average. As for the balance between active and passive (cash benefits) expenditure, we find no evidence of one crowding out the other. Expenditure on cash benefits and on ALMP remain highly correlated, with bene­fits receiving more resources in most countries. Much more than between ALMP- and PLMP-countries, we can distinguish between countries spending little and countries spending much on LMP. A higher GDP and a larger government budget correlate with a higher share of the budget dedicated to LMP and a higher real LMP spending per person wanting to work. At the level of individual countries, we observe changing spending profiles, but no common trend. There is some convergence of labour market policy spending in the observation period, but it is mostly a ‘con­vergence from above’ in the sense that some big spenders drastically cut their expenditure. This holds in particular for cash benefits, but also for ALMP. Some CEE countries increase their LMP spending, start­ing partly from very low initial levels. While training remains the most important spending category among the different types of ALMP, spend­ing slowly shifts away from this costly, but long-term investment in human capital. This is for us the most important sign that the discursive dominance of the social investment paradigm in Europe since the early 2000s is not reflected in the trends of LMP spending. Despite the asymmetric spending on LMP in Europe, we do not postulate further socioeconomic diver­gence between European countries as a consequence: Our multivariate analysis does not unequivocally con­firm aggregate positive effects of ALMP or PLMP on employment. A positive effect of ALMP spending on employment, if it exists, remains small according to our estimates. The econometric literature on the macro-economic effects of LMP is also divided. We used an innovative approach to evaluate the impact of LMPs on the level as well as the distribution of employment (taking on board externalities such as substitution or crowding out) by combining country-level statistics on LMP expenditure with individual data on labour market status drawn from EU-SILC. We separately estimated the effects of LMP expenses on (a) the probability of participating in the labour market (= activity rate), either employed or unemployed); and (b) the probability of employment. This yielded the following results: Contrary to the predictions of the (neoliberal) ‘making work pay’ or the (conservative) ‘dependency’ theory, more generous spending on cash benefits (PLMP) has no negative effect on the probability of employment. The alleged disincentive effect on job search may be offset by a positive ‘social investment’ effect: higher unemployment benefits allow job seekers to invest more in their human capital and in job search. Concerning the probability of economic activity, more generous benefits do have a positive effect. This can be explained by the fact that a better social protection attracts more people into the (formal) labour market. As regards the effects of ALMP, our results are more critical: higher expenditure on such measures tends to go in pair with higher employment rates (as expected) but these effects are not robust across different specifications. More intensive ALMP also goes in pair with lower activity rates, which is more surprising. The most straightforward interpretation of the latter effect would be reverse causality: governments may decide to invest more in ALMP when they consider activity rates as insufficient. However, we tried to rule out such reverse causality by taking into account a time lag of one to two years between ALMP spending and the probability of economic activity. Plausible alternative interpretations are ‘threat effects’ of ALMP and sanctions that drive persons who do not find jobs into inactivity. This suggests that ALMP do have substantial perverse effects, which raises concerns about the design and implementation of ALMP. The most positive aspect of ALMP appears to be their redistributive effect. Female, older, and low edu­cated workers benefit most from LMP: their economic activity and employment is promoted, in contrast to younger, better educated or male workers. Systematically privileging the more disadvantaged groups highlights LMP as a promotor of equality at the labour market