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Do macroeconomics or market conditions drive labor market inactivity? Neither.

Florentin Kerschbaumer's picture
Also available in: Русский


What drives labor market inactivity? Is it pure macroeconomics and labor market conditions?

While these factors play an undeniable role, individual circumstances are equally important.

Consider two examples:

Emily, 42 and from Ireland, is a stay-at-home mom with two children. While she got her bachelor’s degree 20 years ago, she has stayed at home since having her first child and her husband provides sufficient income for the whole family.

Lena, 29 and from Hungary, is a single mom with a 2-year-old child. She did not complete secondary school and lives in a rural area where employment is scarce. Although receiving family and social benefits, she lives in material deprivation.

While both Emily and Lena are registered as economically inactive women with childcare duties, their situations differ dramatically. Due to her husband’s income, Emily is relatively well off, whereas Lena’s economic situation is dire. Emily wouldn’t benefit from activation or training policies – she isn’t looking for a job and already has tertiary education. On the contrary, policies that assist Lena with her childcare responsibilities and increase her chances of finding a job would greatly improve her economic situation.

These examples highlight a bigger pattern: For active labor market policies to work, they need to be tailored and targeted to their beneficiaries. Simply looking at aggregate characteristics of the unemployed is not very informative as the above examples shows.

A new series of World Bank reports – Portraits of Labor Market Exclusion – tackles that very challenge. For twelve countries, the series identifies the ‘labor-market vulnerable’ (either those without jobs or those in precarious employment) and clusters their labor market constraints along three dimensions: lack of financial incentives; lack of job opportunities; and lack of work-related capabilities.  

Using Latent Class Analysis - an advanced statistical method - the reports use these constraints to identify distinct subgroups of the labor-market vulnerable in each country who share the same constraints and socioeconomic characteristics.



In Greece, the analysis leads to eight distinct groups, each of which faces distinct labor-market barriers and exhibits similar socioeconomic characteristics (Figure 1). For example, two of the biggest groups are relatively-educated long-term single unemployed NEETs and Low-income middle-aged unemployed with work experience. These groups would likely require very different policy solutions to be integrated back into the labor market. Subsidizing employment to allow the accumulation of critical working experience and preventing the deterioration of skills would be a good policy for the first group while it would likely not be especially beneficial for the second. Similar characterizations emerge for the other countries in the series.
 
Furthermore, the reports go beyond merely describing the unemployed and also identify subgroups who are vulnerable albeit being employed, thereby allowing for the design of policies targeted to their situation.
 
The results of these analyses give policymakers a bird’s eye view of the challenges that each of these subgroups faces - providing critical input for the design of well-targeted, active labor-market policies. In addition, they scrutinize existing labor market policies to check their effectiveness and efficiency. Activation and employment support programs are often fragmented, not always targeted to priority needs, and spending on them is often relatively low.

Portraits of Labor Market Exclusion is a critical first step in the design of well-targeted active labor market policies in ECA. Policies that will help Lena and many others find gainful employment, thereby reducing vulnerability and increasing prosperity of those who need it the most.