Employment and reintegration of the unemployed; the government has any role to play?

The public employment service (PES) is said to suffer from serious government failure. Consequently, policymakers have formed the idea to privatise the PES next year. But what does a private market for employment services look like? And is there any rationale for government intervention in this market? In this paper we address these, and other, questions. We combine theoretical work on market and government failure in the provision of employment services with an empirical analysis on the effectiveness of policy instruments currently used.

On the basis of this analysis, we discuss the trade-offs underlying the decision to privatise the PES and the subsequent task of regulating private intermediaries First, we show that without any government intervention a market for employment services produces inefficient outcomes. Sources of market failure are (1) a downward pressure on demand through social security, (2) insufficient provision of services for unemployed that are not employable for regular jobs and (3) prejudices of employers towards immigrants, women and older workers. Next, we discuss possibilities for government to correct those sources of market failure. We come up with two measures which are directly focussed on the market for employment services.

The first option for policy is the introduction of job-placement bonuses for intermediaries, together with a tight policy on benefit sanctions. For several reasons, there is a strong mutual dependence between the success of these two measures. First, unemployed who are stimulated to search actively for jobs, need to have access to placement services. Second, intermediaries that are financed on the basis of placements, cannot work with unmotivated people. Third, benefit sanctions are likely to function only when intermediaries have an incentive to inform the benefit office on job-search activities of unemployed.

A second policy option consists of an active role in the provision of services to unemployed that do not have direct access to regular jobs. For this purpose, one may think of subsidies to social enterprises or procurement of services. In the empirical analysis we use a database from the PES, which allows us to study the search behaviour of unemployed. Instruments of active labour market policy - like training, use of career offices and public employment jobs - are found to have a low pay off in terms of improved chances to get regular work. In contrast to this, differences in motivation are found to have strong effects. The empirical analysis shows that a higher motivation increases the effectiveness of the instruments. Therefore we conclude that a policy of benefit sanctions, which is focussed on motivation of unemployed, may contribute to a higher return on investments in reintegration of unemployed.

Recently, the Dutch government has come up with three major policy measures: (1) Privatisation of the PES, (2) the beginning of a 'New Deal'-policy, similar to that in the UK and (3) the green paper on work and income (SUWI), providing for placement bonuses. Generally, the tenor of these measures is in line with our findings.

Still, although benefit sanctions have a legal basis, the actual implementation of sanctions seems to lack an active implementation. Also, our study provides arguments not to leave the national vacancies-applicants database out of the privatisation of the PES. Private intermediaries seem to be better equipped to generate information on vacancies and applicants.