ACTIVATION BY THE 'MAGIC WAND' --DOES IT WORK?

• Author: Vodopivec, Matija

1. Introduction

   Although cash benefit programs for the unemployed are important in cushioning the impact of job loss, they may also generate significant unintentional effects. They may have negative effects on work incentives, encourage dependence on welfare, and attract claims from individuals who work in the informal sector. Moreover, particularly in Europe, activation programs might add to long-term unemployment and social exclusion, increase public expenditures and thus create undue fiscal pressure (Laporsek, Vodopivec and Vodopivec, 2022).

   In order to address these concerns, countries have started to develop and implement activation programs, i.e., programs aimed at boosting the job-finding rate of benefit recipients by, for example, strengthening job-search requirements or imposing stricter monitoring. In addition to boosting the job-finding rate, activation measures may also be directed at promoting transitions from unemployment to shorten the collection of benefits, both to avoid benefit dependency and possible misuse of the benefit by those who may be suspected of working informally. As the name 'activation programs' implies, such measures encourage--and perhaps even more frequently, pressure--jobseekers to become more active in finding work. While precise arrangements of activation programs vary widely across countries, the key target groups of activation are recipients of unemployment and social assistance benefits.

   Arguably, the use of activation programs has been inspired by an implicit belief that activation programs function as an employment 'magic wand'--that they trigger a change of incentives, sometimes instantaneously and with little or no costs, and that by doing so they produce real gains in terms of improved job-finding rates. Implicit in this belief is the idea that the efficiency gains unleashed by activation programs arise from either a reduction of the dead-weight losses imposed by cash transfers in the form of moral hazard, from improved morale and improved job-search skills of jobseekers, or a combination of both.

   While there is no agreed upon definition, Martin (2015) notes that the concept of activation has evolved considerably. In the 1970s and 1980s, it was connected to the idea of shifting the balance of public expenditures on labor market policies in favor of active labor market programs (ALMPs) instead of 'passive' ones like unemployment insurance (UI). Based on subsequent research that recognized interactions between passive and active policies, the concept changed in the 1990s to represent a much more nuanced view. According to OECD (2013, p. 132), the core objectives of activation are 'to bring more people into the effective labour force, to counteract the potentially negative effects of unemployment and related benefits on work incentives by enforcing their conditionality on active job search and participation in measures to improve employability, and to manage employment services and other labour market measures so that they effectively promote and assist the return to work'. And the concept evolved even further--OECD (2015, p. 105) adheres to a much more encompassing concept of activation, defining the objective of activation programs 'to foster more inclusive and resilient labor markets' and putting forward a new framework consisting of institutions and policies that help 'to maintain the motivation of jobseekers to actively pursue employment while also improving their employability and expanding their opportunities to be placed and retained in appropriate jobs'.

   This paper aims to review the experience with activation programs in the following four areas:

1. Strengthening job-search requirements to facilitate transition to jobs (broadening of the definition of a 'suitable' job is also included);

2. Conditioning benefit payments on participation in ALMPs;

3. Monitoring active job search and compliance with other conditions to be eligible for unemployment benefits (UBs);

4. Imposing sanctions for failure to comply with program rules.

   The areas are selected to reflect the core idea of activation--that jobseekers need to be spurred to search and accept jobs by pressing them via tougher rules or sanctions. The selected programs thus rely on the stick to induce desirable behavior on the part of jobseekers. (1)

   Our literature review is motivated by the following two sets of questions. First, do tighter job search requirements and other activation programs stimulate outflow from unemployment --and even more importantly, outflows to employment? And second, if these programs are successful, do they create unintended effects in terms of less stable and worse paid post-unemployment jobs or transitions to inactivity? Accordingly, in judging the successfulness of activation programs, the following outcomes are considered: duration of unemployment, labor market status upon exit from unemployment, probability of finding a job, and post-unemployment outcomes as, for example, level of wages and quality of post-unemployment jobs. (2) Cost effectiveness is also considered, but information about it is rarely available.

   In what follows, we first explain the methodology of the paper. We continue with an overview of findings of the activation literature, focusing on the four areas mentioned above. The final section concludes.

2. Methodology of the literature review

   When selecting the reviewed studies, we followed the following methodological guidelines. First, with one exception, we included only studies published since 2000, with two thirds of the studies published during 2010-2020. Second, we selected only studies that use rigorous methodology and credible strategies to identify program effects. Most of the studies exploit field experiments or changes in programs and policies to form treatment and control groups, and econometrically compare labor market outcomes between such groups. And third, we focused only on the studies that could be classified in one of the four areas outlined above. In instances where the featured programs contain measures that fall into more than one of the reviewed areas, programs are classified based on the predominant measure studied. Based on the above criteria, 44 studies were selected in the analysis (our research was conducted during 2020-2021).

3. Review of international experience with activation

   3.1. Strengthening job-search requirements

   Strengthening job-search requirements is part of conditions to be eligible to UBs receipt and include measures such as more frequent contacts and meeting with the employment offices, better documentation/proving of job search, and a broader definition of a suitable job (that is, a job that UB recipient is obliged to take in order not to lose benefit eligibility).

   In their study of the state of Washington, Johnson and Klepinger (1994) examine the effects of a controlled experiment where the required work-search intensity varied from a complete elimination of work-search requirement to creating individualized work-search requirements and providing intensive services (job search assistance). The authors find that the duration of benefit receipt for workers who were not required to search was three weeks longer in comparison with workers with standard search requirements and were more likely to exhaust benefits. They also provide evidence that in the short term, reemployment wages of workers with no search requirements were slightly higher.

   A recent study by Lachowska, Meral and Woodbury (2016) extends the above study of the state of Washington by looking into the long-term effects of varying work-search requirements. For UI claimants as a whole, the study finds little evidence that long-term effects differed across various groups. But the study finds that for a subset of the unemployed --those not subject to recall to the same job or who did not quit their previous job --more intense examination of eligibility resulted in better job quality, including higher earnings in the year following job loss, a shorter non-employment spell, and a longer tenure in the first post-unemployment job. Moreover, the study finds that better outcomes accrued disproportionately to low-paid workers.

   Manning (2009) and Petrongolo (2009) study the effect of harsher job-search requirements that were introduced in the United Kingdom with the Jobseekers' Allowance (i.e., United Kingdom's UB program) reform in 1996. (3) Both researchers show that in the post-reform period, the claimant outflow rate significantly increased--according to Manning (2009), the probability of exit increased by 8%, and according to Petrongolo (2009), by 20%. Petrongolo (2009) also finds that exits from unemployment increased, but not necessarily into employment. Moreover, she finds that following the reform, the UB recipients for about three years after a job loss recorded a net loss in weeks worked and earnings with respect to the previous UB regime. She concludes that job search requirements have contributed to moving the UBs recipients off the UBs, yet they have not moved to stable or better-paid jobs.

   Maibom, Rosholm and Svarer (2017) analyze employment effects of three randomized experiments that consisted of intensified counseling (via individual or group meetings) or mandatory participation in an ALMP early in the unemployment spell. The only program that showed a positive impact was intensified individual meetings every second week during the first 13 weeks of unemployment, increasing the probability of employment over the next four and a half years by 5%. The program was also cost-effective, saving public resources by close to 4,500...