Academic journal article Economic Review (Kansas City, MO)

Would Active Labor Market Policies Help Combat High U.S. Unemployment?

Academic journal article Economic Review (Kansas City, MO)

Would Active Labor Market Policies Help Combat High U.S. Unemployment?

Article excerpt

Two years after the end of the 2007-09 recession, the unemployment rate in the United States remains above 9 percent--roughly double its pre-recession level.

This elevated level of unemployment has a cyclical and a structural component. The cyclical component reflects weakness in the demand for goods and services, which makes employers reluctant to expand their payrolls. By contrast, the structural component reflects potential mismatches in the labor market. These mismatches may include the types of jobs being created versus the skills of unemployed workers, and locations of new jobs relative to unemployed workers. Because their causes are different, addressing structural problems in the labor market requires strategies that are different from those that address cyclical problems.

U.S. labor market policies historically have focused on providing unemployment insurance during downturns. These programs have provided financial support for unemployed workers on the premise that the cyclical downturns would prove to be temporary. Because these programs do not directly help workers find jobs, they are called passive labor market policies.

By contrast, active labor market policies seek to increase the probability that unemployed workers will find jobs through more direct approaches, such as training and job-search assistance for unemployed workers, and incentives to employers for expanding their workforces. In a number of foreign countries, these policies have been used extensively to combat structural unemployment. Would active labor market policies be an effective tool to help combat high unemployment in the United States?

This article examines the experiences of a sample of countries in the Organization for Economic Cooperation and Development (OECD) that have a history of using active labor market policies. The analysis finds that two types of active programs can be particularly effective: training programs that equip unemployed workers with skills in demand and job-search assistance that matches unemployed workers with employers. Beyond these two program types, there is little evidence that other active programs (such as employment incentives and direct job creation) reduce unemployment significantly. These findings--together with evidence that the U.S. labor market currently suffers from a certain amount of structural unemployment--suggest that the United States could benefit from more training programs and job-search assistance.

The first section describes the passive and active labor market policies used in OECD countries. The second section uses cross-country data to estimate the ability of active labor market policies to reduce unemployment. The third section discusses the implications for the United States.

I. LABOR MARKET POLICIES IN OECD COUNTRIES

Many OECD countries previously have confronted stubbornly high unemployment, even during periods of economic growth. In Europe, the phenomenon was so prevalent that it was called "eurosclerosis." Partly as a result of these historical experiences, OECD countries have instituted different labor market policies to help deal with persistent unemployment.

Economists typically divide labor market policies into passive and active policies. The policies differ in their approach to supporting unemployed workers and the conditions under which they are likely to be most effective. This section reviews the various passive and active labor market policies and describes some of their benefits and drawbacks.

Passive labor market policies

Unemployment benefits and early retirement benefits comprise the bulk of passive labor market policies (PLMP) in use across OECD countries (Chart 1). Unemployment benefits are intended to provide income support for workers who are experiencing a period of joblessness or involuntary work reduction. The most common unemployment benefit is unemployment insurance (UI), which is payable to unemployed workers with some kind of work history and who satisfy other criteria. …

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