The Effectiveness of Active Labour Market Policies in Reducing Unemployment in Transition Economies

The aim of this thesis is to investigate the effectiveness of Active Labour Market Policies (ALMP) in reducing unemployment in European transition and non-transition economies. The theoretical framework proposed to analyse the effectiveness of ALMPs in reducing unemployment indicates that these policies affect unemployment through several different mechanisms. ALMPs can facilitate the matching process, increase productivity, increase labour supply and competition in the labour market, reduce welfare losses of the unemployed and serve as a stimulus to unemployed individuals‘ willingness to work. This research is based on both a country-level analysis using a sample of European transition and non-transition economies (for 2005-2015) and individual-level analysis using cross-sectional data (2012) for Kosovo. The country-level analysis assesses the ALMP effectiveness using two different strategies. The first one investigates the effect of ALMP expenditure (as share of GDP) on the flow from unemployment to employment using a Fixed-Effects panel model and finds a positive effect, in line with expectations. The economic significance of this finding, however, is questionable since the increase in the outflow from unemployment is relatively small. The second strategy investigates whether the ALMP expenditure (as share of GDP) reduces the unemployment rate in a dynamic panel analysis, using a Generalised Methods of Moments (GMM) estimator. This strategy, also, investigates the relative effectiveness of different measures by separately including variables to account for: Training, Employment Incentives, Supported Employment and Rehabilitation, Direct Job Creation and Start-Up Incentives. The results from the second approach find no significant effect of any of the ALMPs in reducing the unemployment rate. The analysis of the ALMP effectiveness at the individual level in Kosovo explores the following measures: On the Job Training, Internship Scheme and Institution and Enterprise Training. This analysis focuses on the following outcomes: beneficiaries‘ probability of finding a job post-participation; beneficiaries‘ probability of increasing job search and beneficiaries‘ probability of having an employment contract. The empirical findings indicate that participation in one of these active measures is associated with a higher individual‘s probability of being employed compared to a non-participant, however the results differ subject to model specification. In addition, the findings also suggest that among employed individuals those that participated in ALMPs are more likely to be in informal employment. Finally, an assessment of the policy implications for European economies seeking to increase and sustain employment through active measures is provided based on the empirical evidence presented in this thesis