Cost and Benefits of Danish Active Labour Market Programmes

1. Cost and Benefits of Danish Active Labour Market Programmes Lars Skipper Anvendt KommunalForskning (+Svend & Jakob) Labour class

2. Why evaluate • Evaluation – taken seriously – represents a method for ensuring that program managers further the goals of their principals – namely taxpayers – rather than simply transferring resources to interested stakeholders, such as program operators, politically favored firms, or themselves. • In practice, many low quality evaluations exist mainly to cover up exactly such behavior; Labour class

3. Why evaluate THERE IS NO SHORTAGE OF POLICY PROPOSALS. THERE IS, HOWEVER, A SHORTAGE OF EMPIRICAL EVIDENCE ON THE EFFICACY OF THESE POLICIES… (James Heckman) Labour class

4. Why evaluate • When programs do not produce benefits in terms of economic development, finding this out allows scarce funds to flow into other, more beneficial activities, or back to the longsuffering taxpayer. • When programs do produce benefits, finding this out can generate political support for program persistence or even expansion. Labour class

5. Goal of Paper • Measure the net benefits of the Active Labor Market Programs in Denmark • Subtracting the programs’ cost from their discounted stream of benefits • Benefits: Earnings gains (11 years), saved public transfers • Cost: administration, education, training, cost of public funds • Exclude: Value of leisure, GE-effects (such as displacement), ex-ante effects (threat) Labour class

6. Econometric Theory • Consider three types of programs: • Classroom training • Private On-the-Job Training • Public On-the-Job Training • Problem: Self-selection among participants • Participants are NINJAs! • Ashenfelter’s Dip Labour class

7. Ashenfelter’s Dip Labour class

8. Ashenfelter’s Dip Labour class

9. Econometric Theory • Selection on observable characteristics • Assumption: The decision to participate becomes random once we condition on a set of observable characteristics • The observed data contains variables that relate to all of the major factors identified by theory (and evidence on similar programs) as affecting both participation and outcomes • This is potentially a very strong assumption. Cannot test it without running social experiments Labour class

10. Econometric Theory • Selection on observable characteristics • Is this plausible? We base it on • Economic theory telling us what variables should mean something for both participation and • Knowledge about the institutions that affect both the selection- and outcome-processes • The existing knowledge in the literature, including comparisons of effects estimated based on mathcing and experimental estimates Labour class

11. Results • Private and public On-the-Job training come out as investments with positive returns • Net present value of quarter of a million DKK for private and 100,000 DKK for public. • Differences in institutional set-up (public employers cannot keep trainees after funds run out) • Main source: Moving unemployed from passive income support to productive activity • Main neglect: Displacement! Labour class

12. Results • Classroom training comes out as a really expensive investment for the taxpayers • Net present loss of almost 100,000 DKK per trainee • Main reason: Expensive courses wasted on non-trainable individuals or equipping trainees with non-marketable skills Labour class