Reducing unemployment? Examining the interplay between active labour market policies

Active labour market policies (ALMP) are important tools that welfare states utilize to influence the labour market. This study analyses the macroeconomic effects of different types of ALMP spending on aggregate unemployment rates, and especially if there is evidence of interdependencies between policies. The types of policies scrutinized are public employment services (PES), training programs, public job creation and subsidized employment, where the PES is singled out as a crucial factor that moderates the effects of other types of labour market programs. The study examines 19 welfare states between 1985 and 2013, using error correction modelling to separate between short- and long-term effects. The results indicate that PES, training and subsidized employment reduce unemployment in the short-run, whereas PES and wage subsidies are associated with reduced unemployment when considering long-term effects. However, PES is found to have indirect effects on other policy types and increased spending on PES is shown to reinforce long-term effects of training programs.