Government expenditure on labour market policies in OECD countries: responding to the economic crisis

ABSTRACT

In most Organization for Economic Cooperation and Development (OECD) countries, the unemployment rate increased considerably during the early stage of the Great Recession of 2008. However, unemployment trends varied by country: some countries were more resilient, resulting in a faster recovery and lower or steady unemployment rates during the recession. This study evaluates the impact of different government expenditures on labour market policies (especially active labour market policies) among OECD unemployment rates. Based on panel regression and a difference-in-difference analysis utilizing panel data from 2001 to 2013, this study discusses how government active labour market policies have worked to reduce the unemployment rate, and how this policy helps resilient countries to adapt to unexpected economic crises.

KEYWORDS:

• Labor market policy
• policy tools
• resilience
• government expenditure
• OECD

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Hyungjo Hur is an Instructor at the Department of Political Science at the Eastern Illinois University. His research focuses on social policy.

Notes

1 According to the global risk reports of the World Economic Forum, survey respondents were asked to assess the likelihood and impact of their individual risks on a scale of 1 to 7, with 1 representing a risk that is not likely to happen or have impact, and 7 representing a risk very likely to occur and with massive and devastating impacts. Unemployment and underemployment had likelihood and impact values of 5. The global risk reports also show how global risks are interconnected, and unemployment is closely linked to fiscal crises.

2 “The National Bureau of Economic Research marks the beginning of the recession in the United States at December 2007, with the trough in June 2009” (Schmitt 2011).

3 Emergency management is the process of developing and implementing policies related to the government response to, as well as preventive solutions for, either upcoming or existing crises (Petak 1985).

4 Nie and Struby (2011) pointed out two more reasons for unemployment in the US: (3) Reduced mobility due to the house lock problem where the unemployed can’t sell their houses due to the depressed housing market, and (4) extended UI benefits that discourage the unemployed from finding jobs. This model can also be applied to most OECD countries, because they experience similar problems.

5 With wage and hiring subsidies, for instance, employers have incentives for hiring new employers (Brown and Koettl 2015).

6 I calculate the average of “ALMP expenditure per unemployed worker as a percentage of GDP per capita’ from 2001 to 2007 (before the 2008 crisis) of each country. Then I divide the countries into two groups, split at the median. Above-median countries are Austria, Belgium, Denmark, Finland, France, Germany, Luxemburg, Netherlands, Norway, Sweden, and Switzerland. Below-median countries are Canada, the Czech Republic, Hungary, Italy, Japan, New Zealand, Portugal, Spain, the United Kingdom, the United States, and the Slovak Republic. See Appendix 1.

7 Resilience has growing importance for both organizations and individuals (Martin and Sunley 2007). The concept originated in psychology, but is rapidly spreading to other fields, including workforce development.

8 Due to limited data for 2001–2013, I only include 23 countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovak Republic, Spain, Sweden, Switzerland, United Kingdom, United States.

9 I define long-term unemployment rate as unemployment lasting 12 months or more (OECD 2016d).

10 When workers don’t have skills that employers want, employability decreases.

11 It is calculated as “Government expenditure on labor market policies as % of GDP * (total population / number of unemployed).”

12 Trade union density is defined as “the ratio of wage and salary earners that are trade union members, divided by the total number of wage and salary earner” (OECD 2016e).

13 This captures the impact of external factors that each country has, defined as “openness to trade” (trade % of GDP): “Trade is the sum of exports and imports of goods and services, measured as a share of gross domestic product” (The World Bank 2016).

14 Share of manufacturing in GDP.

15 Inflation (annual %) shows the rate of price change in an economy as a whole (The World Bank 2016).

16 “Long-term interest rates refer to government bonds maturing in ten years. Long-term interest rates are one of the determinants of business investment. Low long-term interest rates encourage investment and high interest rates discourage it” (OECD 2016d).

17 Total % of population over 65 years old (OECD 2016a).

18 General government debt-to-GDP ratio (OECD 2016c).

19 I also show descriptive statistics of Higher and Lower ALMP Expenditure Countries by Pre-Post Crisis (see Appendix 3 and 4).

20 I use the same criteria that I used in Figure 4 to make two groups of countries. See Appendix 1.

21 Sahin, Song, Topa, and Violante (2011) found that mismatch unemployment across industries contributed at most about 0.8 percentage points to the increase in the unemployment rate. It has declined starting in 2010, but still remains above its pre-recession levels. They also found that 1.4 percentage points of the recent (2011) surge in US unemployment can be attributed to occupational mismatch measured.