Do Active Labor Market Policies Increase Employment?

IMF Working Papers, December 1, 2003

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Using panel data for 15 industrial countries, active labor market policies (ALMPs) are shown to have raised employment rates in the business sector in the 1990s, after controlling for many institutions, country-specific effects, and economic variables.
Among ALMPs, direct subsidies to job creation were the most effective in increasing employment rates.
ALMPs affected employment rates by reducing real wages below levels allowed by technological growth, changes in the unemployment rate, and institutional and other economic factors.
Part of the observed wage moderation may be linked to a composition effect because policies were targeted to low-paid individuals.
Whether ALMPs are cost-effective from a budgetary perspective remains to be determined.
ALMPs are not substitutes for comprehensive institutional reforms.

Employment gains in the business sector occurred alongside reductions in real wages relative to what technological growth would permit.
Changes in the unemployment rate, institutional factors, and other economic variables also mediated the effect of ALMPs on employment.
Targeting of ALMPs to low-paid individuals introduces a composition effect that may explain some of the measured wage moderation.

Direct subsidies to job creation appear most effective among ALMPs evaluated and may merit policy emphasis where raising business-sector employment is the objective.
Cost-effectiveness from a budgetary viewpoint is unresolved and requires further assessment before broad fiscal commitments.
ALMPs should complement, not replace, broader institutional reforms aimed at improving labor market outcomes.

Do Active Labor Market Policies Increase Employment? IMF Working Paper No. 03/234
- Do Active Labor Market Policies Increase Employment? IMF Working Paper No. 03/234 (Markdown version)
- Do Active Labor Market Policies Increase Employment? IMF Working Paper No. 03/234 (PDF)