Activation by the ‘Magic Wand’ – Does it Work?

Can activation programs be considered a ‘magic wand’ that triggers a change of incentives, with little or no costs, and produces real gains in terms of improved job-finding rates? The paper reviews the literature on the experience of OECD countries with such programs in five areas: strengthening job-search requirements, compulsory participation in active labor market programs, stricter monitoring, and imposing sanctions. Programs are judged in terms of duration of unemployment, probability of finding a job, and post-unemployment outcomes such as the level of wages and quality of jobs. Our review finds strong evidence that activation programs can increase the job-finding rates of individuals receiving unemployment or social assistance benefits. At the same time, it cautions that programs may have adverse side effects, ranging from increased exits into inactivity to lower quality of post-unemployment jobs, as well as negative indirect effects on the job prospects of non-participants.