By Verónica Escudero and Hannah Liepmann.
This blog posting was first published by VOX EU in September 2020 and is available here.
Active labour market policies have the potential to improve workers’ employability, but a key challenge in developing and emerging countries is that without income support to cover their basic needs, many workers simply cannot afford to participate in such policies. This column examines the examples of Uruguay and Mauritius and finds that approaches combining both active labour market policies and income support are more effective in improving the labour market perspectives of vulnerable workers than the same policies implemented in isolation. However, the success of integrated policies clearly depends on design and implementation characteristics.
In 2019, around 630 million workers, or almost one in five of those employed globally, were working but poor. These workers live in households with a daily income of less than US$3.20 per person in purchasing power terms (ILO 2020). The inadequate quality of their jobs prevents them and their families from leaving poverty behind. Thus, these workers lack the means to fulfil basic needs such as providing for their children’s education, regular meals, and elderly care; or investing in their own skills to improve longer-term opportunities.
How can governments in developing and emerging countries help vulnerable workers access decent work opportunities? Active labour market policies (ALMPs) have the potential of improving workers’ employability (Card et al. 2018, Escudero et al. 2019, Levy Yeyati et al. 2019). ALMPs include training, public works, employment subsidies, micro-enterprise creation, and labour market services. While many of these policies exist in developing and emerging countries, a key challenge is that often workers who are meant to benefit from ALMPs do not participate. Without income support to cover their basic needs, they simply cannot afford participation (ILO 2016).
Meanwhile, income support, whether it takes the form of unemployment insurance or cash transfers, plays an important role in supplementing the incomes of low-wage or unemployed individuals. It reduces financial hardship and gives workers time to find new employment (e.g. Banerjee et al. 2017; Barrientos 2011, Campos and Coricelli 2010, Devereux and Sabates-Wheeler 2004, ILO 2017). However, income support alone does not help workers improve their skills and escape longer-term poverty either.
This suggests that income support and employment promotion need to come together if governments are to foster pathways to decent work. Yet, little is known regarding the role and effectiveness of these integrated approaches, especially outside high-income countries. In our recent book (Asenjo et al. 2019), we examine whether jointly implemented ALMPs and income support can protect workers’ incomes and promote longer-term employment prospects.
Prevalence of integrated policy approaches
Through an innovative mapping exercise, we assess the different combinations that ALMPs and income support take in emerging and developing countries. We find that the combined approach is already a pivotal element of labour market policy in these countries. Despite differences in design, administration, and level of integration of the different policies, we also identify important regularities.
First, unemployment insurance rarely exists in low-income countries (for example, most sub-Saharan African countries in Figure 2). Nevertheless, integrated approaches play a role there through cash transfer schemes that incorporate ALMP components (the same countries in Figure 1). Moreover, the higher a country’s per capita income, the higher becomes the variety of these embedded ALMPs (e.g. several countries in Latin America, see Figure 1).
Second, as economies start to have a higher income per capita, they introduce unemployment insurance policies to protect workers’ incomes during unemployment and combine these with a growing variety of ALMPs (most often in Europe and Central Asia, see Figure 2). The provision of public works alongside either unemployment insurance or cash transfers tends to be more common among low- and lower-middle-income countries, while higher-middle-income countries frequently offer a combination of activation measures, including also training and start-up incentives.
Figure 1 ALMPs included in cash transfer schemes, by country and type of measure, Asenjo et al. (2019).
Figure 2 Mandatory ALMPs included in unemployment protection schemes, by country and type of measure, Asenjo et al. (2019)
The examples of Uruguay and Mauritius
While the difficulties in coordinating these policies are not trivial, innovative examples in emerging and developing countries show that such policy coordination can enhance access to decent work. In our book, we study two informative cases in depth.
Uruguay implemented a comprehensive intervention, the National Social Emergency Response Plan (PANES), tailored to the poorest segment of the population who were in danger of falling into further hardship during the recession of the early 2000s. The intervention provided beneficiaries with immediate cash support and seven poverty-alleviating programmes giving access to housing, education, healthcare, food assistance and temporary paid labour. Temporary jobs were provided as part of a five-month public works scheme, whereby beneficiaries received double the normal income support, 20 hours of training per month and job search assistance.
The income support component of PANES helped reduce poverty (Amarante et al. 2009) and improve certain health outcomes (Amarante et al. 2016), while its effects on formal employment and earnings were negative (Amarante et al. 2011). For our research purposes, the policy provided an opportunity to extend these earlier studies and compare the effects of only receiving cash transfers versus receiving cash transfers and participating in the public works scheme. This is because only a sub-group benefitted from the public works component, whereas all participants received the income support. Our methodology combines a difference-in-difference approach with propensity score matching. We find that when both policy components are provided together, the programme’s negative effects on labour market prospects disappear (for the details of this analysis, see Escudero et al. 2020). Moreover, the beneficiaries of public works were moderately more likely to be employed after leaving the programme.
In addition, Mauritius has taken a particularly innovative approach in the combined implementation of income support and ALMPs. Its unemployment benefit system is a rare example of a scheme supporting jobless people regardless of whether they were previously working formally or informally (for more detailed analyses, see also Asenjo and Pignatti 2019, Liepmann and Pignatti 2019). Moreover, Mauritian beneficiaries are required to participate in job placement support or a microenterprise creation programme while receiving the income support.
We find that the scheme helped beneficiaries improve their employment prospects in general. First, our regression kink analysis shows that while the unemployment benefits have a small negative effect on formal employment, this does not persist over time. Second, our difference-in-difference analysis shows that job placement was the most effective of the activation measures in terms of promoting rapid re-employment. Training (which is no longer provided) resulted, however, in larger gains in terms of employment and wage prospects over time. This is consistent with positive effects of training that increase over time as human capital is accumulated.