Treatment versus regime effects of carrots and sticks

Public Employment Service (PES) agencies and caseworkers (CW) often have substantial leeway in the design and implementation of active labor market policies (ALMP) for the unemployed, resulting in variation in the intensity of usage per policy. This paper presents a novel framework in which this variation is included to achieve a comprehensive assessment of different ways in which ALMPs can operate and interact. In addition to treatment effects, we consider regime effects which capture how CW and PES affect outcomes through different policy intensities and interactions with job seekers. We propose a novel method to jointly estimate regime effects for two sets of programs, supportive (carrots) and restrictive (sticks) programs. We apply this to contrast regime and treatment effects on unemployment durations, employment, and postunemployment earnings using register data that contain PES and caseworker identifiers for about 130,000 job spells. The results show that “carrots” increase earnings whereas “sticks” decrease them. We find regime effects of a similar order of magnitude. More intensive carrots and sticks regimes each reduce unemployment durations, but with carrots regimes this raises earnings whereas with sticks regimes it decreases them. We also find complementarity between carrots and sticks regime effects. The regime effects are economically substantial. Our comprehensive cost-benefits analyses show that modest increases in the intensity of the carrots and sticks regimes reduce the total cost of an unemployed individual by up to 10%.