How Effective Are Active Labour Market Policies Like The New Deal?

05 Jul 1999

Do active labour market policies like the New Deal programme in the UK and the Workforce Investment Act in the United States actually increase the wages or employment of the people they seek to help? According to new research by Professors James Heckman and Jeffrey Smith, published in the latest issue of the Economic Journal, programmes of this kind make almost no difference to the level of unemployment or the wage rates of those gaining employment. What is more, many official evaluations overstate the effectiveness of such policies because they assume unrealistically that nothing would have happened without the programmes.

How should we evaluate the effectiveness of programmes like the UK''s New Deal and the US Workforce Investment Act, which provide job search assistance, job matching services and skills training to people looking for work? Heckman and Smith argue that the trick is to figure out what would have happened to unemployed people if they had not participated. At first glance, it seems natural to think that nothing would have happened - that they would have remained unemployed. But using unique data from an experimental evaluation of the Job Training Partnership Act (JTPA) programme in the United States, the researchers reveal that this natural assumption is incorrect.

In the experiment, people who applied to and were eligible for the JTPA programme were assigned at random to two groups. One group was allowed to receive the programme''s services and the other was excluded from them. The excluded group indicates what would have happened to unemployed people had they not participated:

  • In contrast to the intuition that without the programme, participants would remain out of work, the JTPA data reveal that the unemployed and the disadvantaged find work almost as well - and for male youth, better - without the programme as with it.
  • For most groups, the difference in employment rates is just a few percentage points.
  • Differences in average earnings are similarly small.

These findings shed new light on the high placement rates often cited by programme officials - placement rates that implicitly (and incorrectly) assume that participants would not find work without the programme.

Heckman and Smith also show that many traditional approaches to evaluation fall down because they make incorrect assumptions about what would happen to the people''s earnings if they did not participate. Many evaluations of government programmes compare the earnings of participants just before and just after participation and attribute the difference to the programme.

The experimental data reveal that participants experience a ''dip'' in earnings prior to the programme, but that their earnings would rebound and grow beyond pre-programme levels even without any programme services. Official evaluations falsely attribute such earnings growth to the programme and thereby produce overly-positive estimates of the effect of the programme.

''The Pre-Programme Earnings Dip and the Determinants of Participation in a Social Programme: Implications for Simple Programme Evaluation Strategies'' by James Heckman and Jeffrey Smith is published in the July 1999 issue of the Economic Journal. Heckman is Professor of Economics at the University of Chicago; Pack is Professor of Economics at the University of Western Ontario.

James Heckman

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Jeffrey Smith

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