Active Labour Market Policy (ALMP) in Developing Countries – Far less effective than policy makers, program participants, and economists typically expect

Jobs are the number one policy concern of policy makers in many countries. The global financial crisis, rising demographic pressures, high unemployment rates, and concerns over automation all make it seem imperative that policy makers employ increasingly more active labor market policies. This paper critically examines recent evaluations of labor market policies that have provided vocational training, wage subsidies, job search assistance, and assistance moving to argue that many active labor market policies are much less effective than policymakers typically assume. Many of these evaluations find no significant impacts on either employment or earnings. One reason is that urban labor markets appear to work reasonably well in many cases, with fewer market failures than is often thought. As a result, there is less of a role for many traditional active labor market policies than is common practice.

Given the importance of jobs for poverty reduction, productivity growth, and social cohesion
(World Bank, 2012), it is no surprise that policy makers have actively pursued policies to try to
help job-seekers find jobs. But as this review has shown, an emerging body of evidence shows
these policies to generally be far less effective than policy makers, program participants, and
economists typically expect. It should be noted that this is not unique to ALMPs in developing
countries: Crépon and van den Berg (2016) in their review of largely developed country evidence
conclude that “the general outlook for ALMPs is rather grim.”

One reason for this lack of effectiveness is a positive one: labor markets (at least in urban areas)
in developing countries actually appear to work a lot better than is sometimes thought. It is easy
to imagine all types of constraints that might inhibit the functioning of labor markets, but in
practice firms appear to be able to fill many vacancies quite quickly, and workers turn down many
job opportunities and quit jobs frequently in pursuit of better opportunities. These facts do not
suggest workers and firms have great difficulties meeting one another, or that job-matches are so
rare and scarce that workers cling to every job opportunity they receive. There may be other
constraints that limit the number of jobs created, such as high minimum wages and inflexible labor
laws, or lack of access to financing and infrastructure that prevent firm growth, but the solution to
these issues lies outside of active labor market policies.

Nevertheless, while this suggests less of a role for traditional active labor market policies, there
still appears to be significant scope for improvements in dealing with structural and spatial
mismatches in labor. As the evidence here has shown, not everything that policy makers try works,
and so these new policy innovations should be piloted against competing alternatives and
accompanied by rigorous impact evaluations in order to test different approaches.

Chosen excerpts by Job Market Monitor. Read the whole story at How effective are active labor market policies in developing countries ? a critical review of recent evidence (English) | The World Bank