Macroeconomic Effects of Active Labour Market Policies: A Novel Instrumental Variables Approach

TL;DR

This paper introduces a new instrumental variables method to assess the macroeconomic impact of active labour market policies in Germany, revealing varied effects on employment and unemployment.

Contribution

It develops a novel identification strategy using overlapping local labour markets and employment agencies to address simultaneity issues in policy evaluation.

Findings

Wage subsidies increase unsubsidised employment share.

Short-term activation and vocational training show no significant macro effects.

Some labour market segments benefit more from ALMP.

Abstract

This study evaluates the macroeconomic effects of active labour market policies (ALMP) in Germany over the period 2005 to 2018. We propose a novel identification strategy to overcome the simultaneity of ALMP and labour market outcomes at the regional level. It exploits the imperfect overlap of local labour markets and local employment agencies that decide on the local implementation of policies. Specifically, we instrument for the use of ALMP in a local labour market with the mix of ALMP implemented outside this market but in local employment agencies that partially overlap with this market. We find no effects of short-term activation measures and further vocational training on aggregate labour market outcomes. In contrast, wage subsidies substantially increase the share of workers in unsubsidised employment while lowering long-term unemployment and welfare dependency. Our results suggest that negative externalities of ALMP partially offset the effects for program participants and that some segments of the labour market benefit more than others.