Policies to help the unemployed can affect feelings of identity
and well-being, so measures need to be evaluated carefully
Unemployment not only causes material hardship but can also
affect an individual’s sense of identity (i.e. their perception of belonging to a specific
social group) and, consequently, feelings of personal happiness and subjective well-being.
Labor market policies designed to help the unemployed may not overcome their misery: wage
subsidies can be stigmatizing, workfare may not provide the intended incentives, and
flexicurity (a system that combines a flexible labor market with active policy measures), may
increase uncertainty. Policies aimed at bringing people back to work should thus take the
subjective well-being of the affected persons more into consideration.
To boost the employment rate of the low-skilled
trapped in inactivity is it sufficient to supplement their earnings?
High risk of poverty and low employment rates
are widespread among low-skilled groups, especially in the case of some
household compositions (e.g. single mothers). “Making-work-pay” policies
have been advocated for and implemented to address these issues. They
alleviate the above-mentioned problems without providing a disincentive to
work. However, do they deliver on their promises? If they do reduce poverty
and enhance employment, can we further determine their effects on indicators
of well-being, such as mental health and life satisfaction, or on the
acquisition of human capital?
Time-limited benefits may yield significant
welfare gains and help underemployed part-time workers move to full-time
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.
Wage subsidies to encourage employers to hire
older workers are often ineffective
Population aging in many developed countries has
motivated some governments to provide wage subsidies to employers for hiring
or retaining older workers. The subsidies are intended to compensate for the
gap between the pay and productivity of older workers, which may discourage
their hiring. A number of empirical studies have investigated how wage
subsidies influence employers’ hiring and employment decisions and whether
the subsidies are likely to be efficient. To which groups subsidies should
be targeted and how the wage subsidy programs interact with incentives for
early retirement are open questions.
Single, open-ended contracts with severance pay
smoothly rising with seniority can decrease both unemployment and job
The trend towards labor market flexibility in
Europe has typically involved introducing legislation that makes it easier
for firms to issue temporary contracts with low firing costs, while not
changing the level of protection that is in place for permanent jobs. This
has created a strong “dualism” in some European labor markets, which might
affect turnover, wage setting, and human capital accumulation. In view of
this, some economists propose replacing the existing system of temporary and
permanent contracts by a single open-ended contract for new hires, with
severance pay smoothly increasing with tenure on the job.
Hiring subsidies can be a very cost-effective
way of helping the unemployed, but only when they are carefully targeted
Long-term unemployment can lead to skill
attrition and have detrimental effects on future employment prospects,
particularly following periods of economic crises when employment growth is
slow and cannot accommodate high levels of unemployment. Addressing this
problem requires the use of active labor market policies targeted at the
unemployed. In this context, hiring subsidies can provide temporary
incentives for firms to hire unemployed workers and, when sensibly targeted,
are a very cost-effective and efficient means of reducing unemployment,
during both periods of economic stability and recovery.
Comprehensive programs that focus on skills can
reduce unemployment and upgrade skills in OECD countries
Reducing youth unemployment and generating more
and better youth employment opportunities are key policy challenges
worldwide. Active labor market programs for disadvantaged youth may be an
effective tool in such cases, but the results have often been disappointing
in Organisation for Economic Co-operation and Development (OECD) countries.
The key to a successful youth intervention program is comprehensiveness,
comprising multiple targeted components, including job-search assistance,
counseling, training, and placement services. Such programs can be
expensive, however, which underscores the need to focus on education policy
and earlier interventions in the education system.
Temporary government schemes can have a positive
Government schemes that compensate workers for
the loss of income while they are on short hours (known as short-time work
compensation schemes) make it easier for employers to temporarily reduce
hours worked so that labor is better matched to output requirements. Because
the employers do not lay off these staff, the schemes help to maintain
permanent employment levels during recessions. However, they can create
inefficiency in the labor market, and might limit labor market access for
freelancers and those looking to work part-time.