Social welfare effects of educational labour market programmes

A number of papers (e.g. Besley and Coate (1992, 1995)) have considered the optimality of ALMP-programmes and especially the deterrence effect, i.e. the feature that participation in ALMP-programmes implies a disutility comparable to disutility for ordinary work. The papers consider the relative levels of benefit rates in ALMP-programmes and in ‘passive’ public income support. In this paper, we focus on ALMP-programmes with a positive outcome, namely education programmes that raise participants’ level of productivity. A’ priori it appears difficult to say whether a positive outcome is a motive for subsidizing ALMP-programmes relative to passive support, or whether individuals’ self-interest reduces the need to support such programmes. Hence we discuss the relative benefit rates in optimal of social policy. The optimal benefit rate in education programmes turns out to be higher or lower than the passive benefit rate depending on the distribution of characteristics, but, under reasonable assumptions, a passive benefit rate equal to zero is never optimal. The latter is a trivial but relevant result, because it is in opposition to the policy in many countries where ALPM-participation is a condition for obtaining social benefits.