A simultaneous-equation model of active labour market policies and change in unemployment rate: evidence from OECD countries

ABSTRACT

The purpose of this article is to investigate the nexus between Active Labour Market Policies (ALMP) and change in unemployment rate. A dynamic simultaneous-equation panel data models have been applied to 16 OECD countries studied over the 2000–2015 period. Our results indicate that the ALMP expenditure leads to the reduction of the change in unemployment. The ALMPs appear to be efficient in reducing the unemployment rate in these countries. Besides, any increase of the change in unemployment rate leads to the decrease of the ALMP expenditure. This occurs in connection to the high costs of the active spending during periods of recession and to the pressure it makes to provide a continuous income to the unemployed through unemployment benefits.

KEYWORDS:

• Active labour market policies
• change in unemployment rate
• dynamic simultaneous equation panel data models
• OECD countries

JEL CODES:

• J8
• J24
• I20

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Armingeon (2007) and Van Vliet and Koster (2011) suggest that in the face of rising unemployment, passive spending increases to the detriment of active spending in order to compensate the unemployed by ensuring them a continuous income.

2 The empirical studies (Iversen and Stephens 2008; Van Vliet and Koster 2011), however, tend to support the view that the right-wing governments decrease ALMP spending.

3 Among researchers of this support are Leibrecht, Klien, and Onaran (2011) who agree about the Keynesian counter-cyclical model.

4 In particular, Keynesians versus monetarists (new classics).

5 See Clerc (2009).

6 Four groups of countries stand out within the OECD (Boeri 2002; Bouis and Renne 2006; Sapir 2006). Indeed, Anglo-Saxon countries (Canada, Ireland, United Kingdom and United States) are distinguished by high incomes, low unemployment rates and reduced unemployment tenure. The countries of continental Europe (Austria, Belgium, France, Luxembourg, Germany and the Netherlands) are characterized by lower incomes and high unemployment rates than those of the Anglo-Saxon countries. The Scandinavian countries (Denmark, Finland, Norway and Sweden) are characterized by relatively high incomes and a high but effective social protection system combined with low unemployment rates. The Mediterranean countries (Italy, Portugal, Spain and Greece) are characterized by low incomes and high unemployment rates.

7 The estimated coefficients are less important in terms of size and significance level than those of (Franzese and Hays 2006; Armingeon 2007; Van Vliet and Koster 2011) who found a negative and significant correlation at 1% level which implies that the 1% increase in the unemployment rate leads to a reduction in ALMP spending by -0, 094 points, -0, 98 points and -0, 45 points respectively.

8 Compared to (Tepe and Vanhuysse 2013) who found that 1% increase of left-gov decreases the ALMP of 0.054 points, our coefficient of left-gov is considerably larger and have greater statistical significance.

9 Rueda (2005) suggest that right government (rather than left-gov) is associated with more generous Passive Labor Market Policies. Iversen and Stephens (2008) showed that an increase of 1% of left-gov leads to 0,010% increases of the ALMP.

10 Compared to the results of (Iversen and Stephens 2008; Van Vliet and Koster 2011) which represent GDP coefficients of (−0,011 ** and −0, 39 **), our coefficient of GDP is considerably similar in terms of signs but it is considerably larger in value and have lower statistical significance (−0,951*).

11 Unemployment rates rose considerably at the start of the 2007 crisis in most OECD countries, but in different ways from one country to another (World Economic Forum 2014, 2015, 2016). While the unemployment rate in the United States increased by 5 percentage points between 2007 and 2009, countries such as Sweden and the Netherlands experienced a somewhat moderate increase over the same period (OECD 2016). On the other hand, other countries have experienced stability if not a decline in their unemployment rate.

Additional information

Notes on contributors

Marwa Sahnoun

Marwa Sahnoun obtained her PhD in economics from the Faculty of Economics and Management of Sfax, Tunisia, and is currently worked for the University of Sfax as teaching assistant. Her current research focuses on assessing the effectiveness of labour market policies, the analysis of labour market institutions, the human capital, the economic development and the quality of governance.

Chokri Abdennadher

Chokri Abdennadher is Professor of Economics at the Faculty of Economics and Management of Sfax, Tunisia. His research interests include human capital, labor market analysis, higher education and professional integration, adjustment education employment, labor market segmentation and wage differentials.