Do public works programs work? Some unpleasant results from the East German experience

We analyze the effectiveness of public works programs (PWP, Arbeitsbeschaffungsmaßnahmen) in east Germany as measured by their effects on individual future re– employment probabilities in regular jobs. These are estimated by discrete hazard rate models on the basis of individual–level panel data. We account for unobserved individual heterogeneity in both the PWP participation and in the outcome equations. In the latter, we differentiate between transitions into "stable" and "unstable" employment after the PWP. We find that these programs seem to have no special targeting focus on disadvantaged groups in the labor market and that participants are, on average, worse off concerning their re–employment prospects in regular jobs than unemployed people who do not join such a program. A possible explanation for this result is that PWP participants search less intensively for a regular job while on such a program than unemployed non-participants. Thus, our results cast serious doubts on both the effectiveness and the equity aspects of public works programs in east Germany. Non–Technical Summary There has been surprisingly little research on the employment effects of public works programs (PWP) which have been used extensively to cushion the repercussions of the restructuring process on the east German economy. Following the microeconometric approach to the evaluation of the employment effects of labor market programs, we estimate re–employment probabilities of PWP participants and unemployed non–participants in regular jobs, where we distinguish between stable and unstable employment. Stable employment is defined as obtaining regular employment within twelve months after the spell has ended and being still employed at the end of this period. The employment effects of these programs are estimated separately for men and women and for two subperiods on the basis of the east German Labor Market Monitor covering the period 1990 to 1994. Our results on the effectiveness of public works in bringing people back into stable employment are not encouraging. We find that public works participants are, on average, worse off in terms of individual re–employment prospects than unemployed people who do not join a public works program. A possible explanation for this result is that PWP participants search less intensively for a regular job while on such a program than unemployed non-participants. However, we cannot find any evidence for the hypothesis that there are disincentive effects to take up regular jobs due to an allegedly high level of relative earnings in PWP. Furthermore, these programs seem to have no special targeting focus on disadvantaged groups in the labor market. Our results therefore cast serious doubts on both the effectiveness and the equity aspects of public works programs in east Germany. Given the scale of PWP in terms of participants and expenditures, policy makers may reconsider the role of public works programs as an active labor market policy tool. Since related research for east Germany has shown that training programs increase participants' re–employment prospects relative to unemployed job search, we conclude that a re–allocation of expenditures for "active" labor market policy rather than overall expenditure reductions could increase its effectiveness.