Education and active labour market policy complementarities in promoting employment: Reinforcement, substitution and compensation

Abstract

This paper theorises and empirically assesses how education and active labour market policy (ALMP) relate to each other in shaping individuals' employment chances in Europe. It provides a theoretical base for assessing policy complementarities building on sociological skill-formation literature, varieties of capitalism and social investment literature. Two hypotheses of complementarity are advanced: reinforcement whereby higher investment in general skills via education boosts ALMP effectiveness; and substitution-compensation whereby investments in either policy suffice, rendering individual employment chances less dependent on ALMPs at higher (prior) educational investment levels. The advanced theoretical propositions are empirically tested by looking at how individual employment chances are affected by national ALMP efforts conditional on workforce education, distinguishing between individual- and national-level educational attainment. Analyses draw on micro-level EU-SILC longitudinal data 2003-2015 from 29 European countries and 285 country-years applying mixed-effects dynamic panel regression models. Results highlight the complementarity of education in the functioning of ALMPs and show that the education-ALMP interplay follows different dynamics when individual or national education are considered, with substitution-compensation for the former and reinforcement for the latter. Higher individual educational attainment is associated with lower marginal returns from national ALMP efforts, with higher ALMP effectiveness among the lower-educated. By contrast, higher national educational attainment is associated with increased ALMP effectiveness, with ALMPs tending to be far less effective at low levels of highly educated workforce. Different interaction patterns are observed for youth, indicating increased difficulty in activating this risk group.