Electoral cycles in active labor market policies

Abstract

We examine how electoral motives influence active labor market policies that promote (short term) job-creation. Such policies reduce measures of unemployment. Using German state data for the period 1985 to 2004, we show that election-motivated politicians pushed job-promotion schemes before elections.

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Fig. 1

Notes

  1. 1.

    Electoral cycles have been shown, for example, in OECD countries (Katsimi and Sarantidis 2011; Potrafke 2011a), the European Union (Efthyvoulou 2011), the German states (Schneider 2010; Tepe and Vanhuysse 2009), Canadian provinces (Blais and Nadeau 1992; Reid 1998; Tellier 2006), Portugese municipalities (Veiga and Veiga 2007; Aidt et al. 2011), Brazilian municipalities (Sakurai and Menezes-Filho 2008, 2011), French municipalities (Foucault et al. 2008). For country studies see, for example, Grier (2008), Berger and Woitek (1997), Belke (2000), Batool and Sieg (2009), Potrafke (2012), Ferris and Voia (2011).

  2. 2.

    To be sure, the success of ALMP programs is ambiguous and varies across countries. In Switzerland and Germany, for example, ALMP programs hardly shortened unemployment duration (Lalive et al. 2008; Hagen and Steiner 2000; Fertig et al. 2006). In Poland, training programs have increased the probability of individual employment, whereas wage subsidies have had a negative influence on individual employment probability (Kluve et al. 2008). Using data from Denmark, Graversen and van Ours (2008) find positive activation program effects on unemployment duration and job finding rates. Evidence from the United States suggests that taxpayer-financed job-training programs are “successful” mainly because the individuals receiving such training are more employable even before entering the program, that is, admissions officers “skim the cream” off the top of the pool of applicants (see, e.g., Bell and Orr 2002). The ambiguity of ALMP success notwithstanding, politicians have implemented ALMP programs for a long time.

  3. 3.

    There are several ALMP instruments which broadly remained the same but were extended over time. Thomsen (2007) refers to the SGB III as a legal basis and distinguishes between “Measures to Enhance and Adjust the Qualification of the Individuals”, “Counselling and Assistance for Regional and Vocational Mobility”, and “Subsidised Employment”. The latter category consists of wage subsidies and two groups of employment programs, namely job-creation schemes and structural adjustment schemes. They both establish the so-called second labor market.

  4. 4.

    Local authorities also play an important role in ALMP because they arrange new jobs, find positions for unemployed persons and negotiate locally with the so called “Traeger” (municipal job-creation companies or similar local institutions), but they are not responsible for the budget decisions.

  5. 5.

    The so-called “Arbeitsbeschaffungsmaßnahmen” (job-creation schemes) encompass subsidized jobs in the second labor market that are intended to reintegrate unemployed persons into employment. Their duration is limited and they often comprise tasks in the low-skilled sector.

  6. 6.

    We use the number of individuals in job-creation schemes instead of the inflows into job-creation schemes as the measures vary in duration.

  7. 7.

    By contrast, panel data unit root tests for the number of individuals enrolled in job-creation schemes (per 1000 inhabitants) in levels provide mixed results. In any event, the regression results show clearly that the model in levels is spurious: the estimated coefficient of the lagged dependent variable is nearly 1 and the associated t-statistics exceed 20. We therefore estimate the model in growth rates.

  8. 8.

    By employing OECD panel data, the results by Goerke et al. (2010) suggest that leftwing governments were more likely than rightwing governments to raise unemployment benefits. Leftwing governments did not, however, increase the growth rate of ALMP spending in OECD countries (Potrafke 2010).

  9. 9.

    The much smaller Free Democratic Party (FDP) and Green Party (GR) have played an important role as coalition partners in the former West German states. While the SPD has formed coalitions with the three other parties, the CDU never joined a coalition with the Greens on the federal or state level during the period analyzed in this paper. We will also consider the influence of the different coalition types, because the left-right dimension may neglect ideological differences between government parties within a “camp” (e.g., on the left between SPD/FDP and SPD/GR coalitions). As minority governments and other government formations have played a negligible role, they will be subsumed under the coalition types mentioned above.

  10. 10.

    The fixed year effects also control for specific historical events such as the German unification.

  11. 11.

    In accordance with large sample properties of the GMM methods, e.g., the estimator proposed by Arellano and Bond (1991) would be biased in our econometric model with N=10.

  12. 12.

    The coalition type dummies take the value of one when the specified coalition type was in power and zero otherwise. We distinguish between six different coalition types: CDU, CDU/FDP, CDU/SPD, SPD/FDP, SPD/GR, and SPD. With respect to the grand coalitions (CDU/SPD), we do not control for the identification of the parties that appointed the prime minister. To avoid perfect collinearity between the coalition type dummies, one of the coalition type dummies must function as the reference category (here SPD). The estimated effects of the other coalition type dummies then need to be interpreted as deviations from the reference category.

  13. 13.

    We employ data by the German Federal Statistical Office on the number of firms and the number of employees in these firms in the manufacturing sector. The fiscal equalization variable equals the funds in million Euros of constant purchasing power that each state received (positive amount) or spent (negative amount) in period t.

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Acknowledgements

We would like to thank Florian Baumann, Mark Bernard, Viktor Brech, Axel Dreher, Tim Friehe, Jan Fries, Laszlo Goerke, Florian Hett, Jeroen G. Klomp, Daria Orlova, Carsten Pohl, Nikolai Stähler, William F. Shughart II, Viktor Steiner, Heinrich Ursprung, two anonymous referees, the participants of the Annual Meeting of the Public Choice Society in Las Vegas 2009, the Annual Meeting of the European Public Choice Society in Athens 2009, the Annual Congress of the European Economic Association in Barcelona 2009, the Annual Conference of the European Society for Population Economics in Seville 2009, the Annual Meeting of the German Economic Association (Verein für Socialpolitik) in Magdeburg 2009, the CESifo Workshop on Political Economy in Dresden 2008, the Brown Bag Seminars at the University of Tübingen 2008 and the University of Konstanz 2008 as well as the Research Seminar at the University of Duisburg-Essen 2008 for helpful comments. Mario Mechtel gratefully acknowledges financial support from the German Research Foundation (DFG). Felix Weber has provided excellent research assistance.

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Mechtel, M., Potrafke, N. Electoral cycles in active labor market policies. Public Choice 156, 181–194 (2013). https://doi.org/10.1007/s11127-011-9890-z

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Keywords

  • Political business cycles
  • Opportunistic politicians
  • Active labor market policies

JEL Classification

  • P16
  • J08
  • H72
  • E62
  • H61