Assessing the impact of labour market spendings on unemployment dynamics across demographics in OECD countries

Abstract

This study investigates the long-run effects of labour market policies on unemployment dynamics in 36 OECD countries from 2004 to 2022. Derived from second-generation panel methods that address cross-sectional dependence and heterogeneity, the results indicate that activation policies without providing employment maintenance incentives are associated with higher unemployment. Institutional and public training expenditures mainly reduce youth unemployment, while minimum income benefits and wages contribute to higher adult and total unemployment, reflecting disincentivising effects and wage rigidities. Rising labour force participation increases measured unemployment by re-engaging marginally attached workers. Robustness checks across sub-periods and welfare-regime clusters reveal heterogeneity, showing that policy effects are context-dependent and time-sensitive rather than uniformly stable. Causality tests confirm two-way interactions between unemployment and labour market policies. These findings underscore the need for nuanced, age-specific strategies that integrate activation measures, targeted training, and carefully calibrated income support to promote inclusive and effective labour markets in advanced economies.