Arbeitslosigkeit, Arbeitsuche, Workfare, Unemployment, Job search

Bas van der Klaauw

Gerard J. van den Berg

English

Research Papers in Economics

JOB SEARCH MONITORING
AND SANCTIONS
GERARD J. VAN DEN BERG AND
BAS VAN DER KLAAUW*
Introduction
European labor markets display high proportions of
long-term unemployed workers (e.g. Machin and
Manning 1999). Being unemployed causes skill loss,
and being long-term unemployed leads to discourage-
ment and stigmatization. All of this reduces the re-
employment probabilities (e.g. Frijters and Van der
Klaauw 2006). In principle, a wide range of policy
measures is available to prevent unemployed individ-
uals from becoming long-term dependent on benefits,
and to stimulate and assist the long-term unemployed
workers in their search for jobs. Examples are subsi-
dized employment for youth and long-term unem-
ployed workers, training and schooling programs.
Unfortunately, the evidence on the effectiveness of
these policies is not encouraging (see e.g. Heckman,
LaLonde and Smith 1999 for an overview).
In this paper we consider the evidence for a rather
novel set of policy tools, namely monitoring the job
search effort of unemployed workers and punishing
them financially if they do not meet the effort re-
quirements.1 In OECD countries,monitoring has be-
come increasingly important (see OECD 2000 for a
survey). Monitoring may be purely administrative.
For example, the case worker may double-check
whether the unemployed individual has made the
applications that (s)he states to have made in the
submitted monthly overview of job search activities.
However, monitoring also often involves regular
meetings at the UI agency or the employment office,
at which recent search activities are evaluated and a
plan for the next period is made. This may even in-
clude a directive to accept a particular open vacancy.
If the unemployed worker does not comply with the
guidelines, or does not show up at meetings, or does
not carry out the monthly plan, then he may be pun-
ished with a sanction in the form of a benefits reduc-
tion.A typical punishment for insufficient job search
is a 15 percent reduction of unemployment benefits
for a period of two months.
The key problem for the unemployment agency is
that monitoring is costly. Usually the agencies only
consider samples of cases, so that individual detec-
tion rates are smaller than 100 percent.The costs of
monitoring formal job search, such as responding to
personnel advertisements and registrating at the
public employment office, are relatively low. How-
ever, informal job search, such as finding job offers
through referral by an employed worker, a friend or
a relative, is virtually impossible to monitor.We will
discuss under which circumstances monitoring is a
useful policy.In this we rely heavily on Van den Berg
and Van der Klaauw (2006).
Theory
This section provides an informal description of some
economic-theoretical insights regarding the effects of
monitoring and sanctions. Consider unemployed
workers who endogenously determine their search
effort. Job offers can arrive through formal as well as
informal search channels, each with its own specific
characteristics. We take monitoring to be concerned
with compliance to an explicit lower bound for the
amount of formal job search effort.If the unemployed
worker does not comply with this requirement, he is
at the risk of getting a temporary benefit reduction.
Full compliance to the monitoring requirements can
be achieved by a sufficiently high probability of de-
tecting a lack of search effort and a sufficiently se-
vere punishment. In practice, sanctions are not un-
common. Apparently, certain unemployed workers
are willing to take the risk of being given a sanction.
Field research among case workers shows that mon-
CESifo DICE Report 2/2005 26
Forum
*Gerard J. van den Berg is Professor at the Free University
Amsterdam and research fellow of IZA, IFAU-Uppsala, CEPR,
IFS and the Tinbergen Institute; Bas van der Klaauw is Associate
Professor at the Free University Amsterdam and research fellow of
CEPR and the Tinbergen Institute.
1 We restrict attention to monitoring after inflow into unemploy-
ment and we ignore effects on the size and composition of the in-
flow (Black et al. 2003).CESifo DICE Report 2/2005 27
Forum
itoring is imperfect (i.e., based on samples), so that
indeed it may be optimal for some individuals to de-
liberately run the risk of being caught.
Monitoring only affects job search behavior if the
minimum search requirements are above the opti-
mal formal job search effort in the absence of moni-
toring. We restrict attention to this case. We assume
that unemployed workers know the relation bet-
ween search behavior and the probability that a
sanction will be imposed. Some unemployed work-
ers will be more willing to take the risk of being de-
tected than others. However, monitoring causes
unemployed workers to devote more effort to for-
mal job search. Unemployed workers are forced to
behave sub-optimally from their private point of
view, and therefore they lower their reservation
wage. With monitoring, being unemployed is less
attractive, which causes unemployed workers to be
less selective on jobs.
At the same time,monitoring typically reduces amount
of informal job search effort.What is more,the net re-
sult of the increase in formal effort and the decrease in
informal effort may actually be negative.In particular,
if informal job search is more effective than formal job
search,then monitoring may easily have a perverse ef-
fect on re-employment probabilities. In this case mon-
itoring is clearly an ineffective policy.2
Monitoring is more likely to increase re-employment
rates if the informal search channel is relatively unim-
portant compared to the formal search channel.
“Unimportant” here means that the informal search
channel is not very fertile, or that informal search
effort is already very small so that there is not much
scope for substitution. The empirical literature is
informative on the use of different search channels by
different types of workers. There is evidence that
workers whose chances to find a job are low, such as
long-term unemployed workers, workers in sectors
with unfavorable circumstances,and workers in reces-
sions, all rely to a relatively large extent on formal
search. Such individuals do not have access to infor-
mal search channels, or their informal search channel
has dried up. For them, monitoring may have a posi-
tive effect on re-employment rates. Conversely, for
individuals with favorable characteristics or good eco-
nomic circumstances, the re-employment rate is not
likely to increase upon stricter monitoring,and it may
even decrease. Here one may think of well-qualified
unemployed workers with a short elapsed unemploy-
ment duration in good economic circumstances.
An unemployed worker who devotes less effort to
formal job search than the minimum requirements
may at some point get a sanction.We now turn to the
effects of imposition of a sanction. Since unem-
ployed workers do not anticipate the actual moment
of imposition of a sanction, the sanction causes a
downward jump in the reservation wage at the mo-
ment of imposition. At the same time, the unem-
ployed worker increases both formal and informal
search effort since the lower benefit level makes it
less attractive to be unemployed. Therefore, at the
moment at which a sanction is imposed, the transi-
tion rate from unemployment to work jumps
upward. These effects are temporary. The unem-
ployed worker knows the duration of the sanction
and anticipates on the moment at which the sanction
period expires.
However, sanctions are more than only a temporary
benefit reduction. Once a sanction has been im-
posed, the unemployment agency often provides the
unemployed worker with some assistance on how to
improve his behavior to avoid future sanctions and
on how to search for jobs more effectively. At the
same time the behavior of the unemployed worker is
more closely monitored,and the magnitude of a sub-
sequent sanction is often much larger. Data show
that recidivism is very rare, which suggests that pun-
ished unemployed workers comply to the minimum
search requirements. The fact that the individual
received a sanction at all suggests that this individual
did not have much scope for substituting informal
search effort into formal search effort. The sanction
and the closer monitoring afterwards then cause a
permanent increase in re-employment rates,through
higher formal search effort and lower reservation
wages.
Empirical results
In this section we discuss some of the empirical evi-
dence. Linking this with the theoretical insights
enables us to extrapolate the empirical results and to
draw conclusions about a wider set of labor market
policies for job search assistance and monitoring of
search effort. In contrast to the previous section, we
2 See Van den Berg and Van der Klaauw (2006) for a detailed analy-
sis.The results bears an analogy to results in principal-agent mod-
els with multi-talking, where the principal incompletely observes
the performance of the agent (Milgrom and Roberts 1992).This lit-
erature also often concludes that contracts based on the perfor-
mance in a single task can give rise to dysfunctional behavior and
may be less efficient than lump-sum contracts.start off by considering sanctions and then turn to
monitoring.
There is only a limited literature on the effects of
punitive benefit reductions on re-employment of
unemployed workers. For the Netherlands,Abbring,
Van den Berg and Van Ours (2005) and Van den Berg,
Van der Klaauw and Van Ours (2004) investigate the
effect of imposing sanctions on the re-employment
rate of respectively UI recipients and welfare recipi-
ents.The empirical analyses use the so-called Timing-
of-Events approach. This entails the estimation of a
model describing the process at which sanctions are
imposed and the process at which individuals move to
work. To control for selectivity of the imposition of
sanctions,the unobserved heterogeneity terms in both
hazard rates are allowed to be correlated with each
other. The approach does not require instrumental
variation but relies instead on random variation in the
timing of treatment (Abbring and Van den Berg 2003).
Both empirical studies find that the actual imposi-
tion of a sanction has a positive effect on re-employ-
ment. Remarkably, in both cases, the exit rate to
work doubles after the sanction.3  Moreover, the
effects on the exit rates are long-lasting, in that they
do not disappear after the benefits reduction has
expired.
For the welfare recipients one may argue that two
times a small number is still a small number. To
examine this more closely we translate the effect on
the exit rates to work into effects on exit probabilities
to work. If no sanctions are applied, then the proba-
bility that the average welfare recipient finds work
within two years after inflow is equal to 0.66. How-
ever, if the same individual had a sanction imposed
after 6 months of welfare,then the probability of leav-
ing within two years increases to 0.91.Now consider a
50-year old individual who is otherwise equal. If no
sanctions are applied, then his probability of leaving
welfare within two years after inflow is equal to 0.29.
If he had been given a sanction after 6 months, then
this probability increases to 0.54.
Clearly, these effects are substantial and they indi-
cate that the unemployed individuals are responsive
to monetary incentives.To put this differently,the re-
employment rate can be substantially increased a-
mong individuals who are at risk of a sanction, if one
tightens the search effort conditions for benefits en-
titlement. Presumably, the threat of severe addition-
al sanctions plays a major role in the magnitude of
the effect. Note that the studies do not examine the
effect on the characteristics of the job that is accept-
ed.It cannot be ruled out that sanction recipients are
so desperate that they accept any job they can get,
whereas it could be socially optimal to search longer
for a job with a high match-specific productivity.
Unfortunately, it is difficult to obtain register data
that contain longitudinal individual information on
unemployment durations, sanctions, and characteris-
tics of the post-unemployment job, like the hourly
wage and the job contract.
Another noteworthy result from the above studies is
that the individuals with very unfavorable personal
characteristics are not as often sanctioned as one
might expect. This might be because they fear the
economic consequences of a sanction so much that
they behave in an exemplary way. Alternatively, the
case worker may feel sorry for them and may use his
discretionary power to withhold sanctions for them.
Field research supports the latter explanation.
Note that the estimated effect is only the effect of
actually imposing the sanction. Given that the data
are from a world with sanctions we cannot use these
studies to identify the effect of having a benefits sys-
tem with sanctions as opposed to a benefits system
without sanctions. For this we need to compare dif-
ferent monitoring regimes.
There is a relatively large empirical literature on job
search monitoring. We summarize the results that
are based on social experiments. Van den Berg and
Van der Klaauw (2006) examine a monitoring scheme
for short-term unemployed workers with good labor
market prospects in the Netherlands.They show that
monitoring leads to substitution from informal search
methods to formal methods. Clearly, this subpopula-
tion of individuals has much scope for job search
channel substitution. Within it, sanctions are almost
never observed.Also, the monitoring of them has no
significant effect on re-employment rates.
Other studies show that the effect of monitoring on
the transition rate to work is stronger if the labor
market prospects are worse.Also,the more intensive
the monitoring,the larger the effect on the transition
rate to work (Johnson and Klepinger 1994; Gorter
and Kalb 1996; Dolton and O’Neill 1996; Klepinger,
Johnson and Joesch 2002;Ashenfelter,Ashmore and
Deschênes 2005).
CESifo DICE Report 2/2005 28
Forum
3 Lalive,Van Ours and Zweimüller (2002) find similar results for UI
recipients in Switzerland.CESifo DICE Report 2/2005 29
Forum
Discussion
The results from the microeconometric studies on
the effects of monitoring and sanctions are in agree-
ment with the theoretical predictions.We can draw a
number of conclusions from them. First, stricter
monitoring of job search behavior is not always a
useful policy to stimulate re-employment.For indivi-
duals with very favorable characteristics or in very
good economic circumstances, the re-employment
rate is not likely to increase upon stricter monitor-
ing, and it may even decrease. Conversely, for indi-
viduals whose chances to find a job are lower,such as
low-skilled workers,long-term unemployed workers,
workers in sectors with unfavorable circumstances,
and workers in recessions, monitoring (in combina-
tion with the threat of punishment for non-compli-
ance) has a positive effect on re-employment rates.
Of course,for monitoring to increase re-employment
rates, the search effort requirements should be
demanding.
Actual imposition of a sanction has a positive effect
on re-employment. Basically, the exit rate to work
doubles after the sanction. Moreover, the effect is
long-lasting, in that it does not disappear after the
benefits reduction has expired.These results indicate
that the unemployed individuals are responsive to
monetary incentives.
Evidently,monitoring is often a useful policy tool.One
may enhance the effectiveness by linking it to a profil-
ing system for unemployed workers. After all, the
effect of monitoring depends on characteristics of the
individual and his environment. Unemployed individ-
uals will not participate voluntarily in a monitoring
scheme, since it reduces their reservation wages, so
one needs to assign individuals to the scheme (or not).
It is risky to let case workers do this assignment.They
tend to use their discretionary power to reduce the
intensity of monitoring (and to withhold sanctions) for
unemployed individuals who in their view have very
bad labor market prospects.This is ironic in the light of
the fact that intensive monitoring works best for those
individuals.
If a supporting profiling system is unavailable, or if
the unemployed have good labor market prospects,
then a general decrease of the unemployment bene-
fits level without search requirements is to be pre-
ferred even if the unemployment agency has infor-
mation on formal job search.A reduction in benefits
that gives the same reservation wage as monitoring
is then more effective in stimulating re-employment:
it is a less expensive policy, while the unemployed
workers are indifferent.
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Job Search Monitoring and Sanctions

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Job Search Monitoring and Sanctions

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