Labor market frictions, search and unemployment

All developed economies have unemployment benefit programs to protect workers against major income losses during spells of unemployment. By enabling unemployed workers to meet basic consumption needs, the programs protect workers from having to sell their assets or accept jobs below their qualifications. The programs also help stabilize the economy during recessions. If benefits are too generous, however, the programs can lengthen unemployment and raise the unemployment rate. The policy challenge is to protect workers while minimizing undesirable side effects.

Expenditures on job placement and related services make up a substantial share of many countries’ gross domestic products. Contracting out to private providers is often proposed as a cost-efficient alternative to the state provision of placement services. However, the responsible state agency has to be able and willing to design and monitor sufficiently complete contracts to ensure that the private contractors deliver the desired service quality. None of the empirical evidence indicates that contracting-out is necessarily more effective or more cost-efficient than public employment services.

The Covid-19 pandemic has produced unprecedented negative effects on the global economy, affecting both the demand and supply side. Its consequences in terms of job losses have been important in many European countries. A large number of firms have been forced to dismiss at least part of their workforce or to close down all together. Considering that young people are usually penalized more than their adult counterparts during economic crises due to the so-called “last-in-first-out” principle, it is worthwhile to evaluate if the youth will also end up paying the highest price during this pandemic-induced recession.

Many OECD countries have, or have had, a policy that exempts older unemployed people from the requirement to search for a job. An aging population and low participation by older workers in the labor market increasingly put public finances under strain, and spur calls for policy measures that activate labor force participation by older workers. Introducing job search requirements for older unemployed workers aims to increase their re-employment rates. Abolishing the exemption from job search requirements for the older unemployed has been shown to initiate higher outflow rates from unemployment for them.

A considerable share of the labor force consists of underemployed part-time workers: employed workers who, for various reasons, are unable to work as much as they would like to. Offering unemployment benefits to part-time unemployed workers is controversial. On the one hand, such benefits can strengthen incentives to take a part-time job rather than remain fully unemployed, thus raising the probability of obtaining at least some employment. On the other hand, these benefits weaken incentives for part-time workers to look for full-time employment. It is also difficult to distinguish people who work part-time by choice from those who do so involuntarily.

Time plays an important role in both the design and interpretation of evaluation studies of training programs. While the start and duration of a training program are closely linked to the evolution of job opportunities, the impact of training programs in the short and longer term changes over time. Neglecting these “dynamics” could lead to an unduly negative assessment of the effects of certain training schemes. Therefore, a better understanding of the dynamic relationship between different types of training and their respective labor market outcomes is essential for a better design and interpretation of evaluation studies.