Evaluation of active labor market policy reform: Employment outcomes of employment rehabilitation services

Abstract Purpose The purpose of this study is to examine the effect of the Estonian active labor market reform in 2016, which introduced a new policy concerning employment rehabilitation services. As a research question, we investigate how such services may have affected the employment outcomes of people with mental and/or physical impairments. Methods Our sample includes 9,244 people from 2016 to 2020, with a mean age of 46 years. Due to multiple entries to the services, we have more than 11,000 episodes, and monthly panel property increases the number of observations by over 100,000. We use propensity score matching in combination with fixed effects panel regressions to analyze how the completion of the scheduled rehabilitation plan affected monthly employment duration. Results Our results indicate that completing the rehabilitation service yields on average 2.6 months longer post-rehabilitation employment, compared to matched individuals who discontinued the service. This effect was larger when already employed and male participants entered the service, while weaker effects were observed in the case of individuals with only mental disabilities. Conclusions Overall, we conclude that while completing the scheduled rehabilitation plan has a positive effect on employment outcomes, still maintaining employment status seems to remain a challenge, based on the relatively modest effect sizes. Thus, we question the economic arguments behind the reform.