Do Institutions Make a Difference? Financing Systems of Labor Market Policy

In recent years the hopes of finding a solution for the puzzle of mass unemployment shifted to labor market institutions such as the system of regulation and industrial relations. The following study takes up a much neglected aspect of labor market institutions, the issue of financing labor market policy. After developing the analytical framework, the systems of financing labor market policy in six countries are briefly described. Next are analyzed the effects of different financing systems on expenditures for active labor market policy – as an essential element in fighting unemployment. Financial systems, however, influence not only the level but also the structure of labor market policy which in turn has implications for its allocational and distributional effects. Finally, some lessons are drawn from the international comparison, the main thesis is illustrated by the German case. Institutional incongruity, i.e. a mismatch between organizational structures and functions, may have two effects, leading political decision makers to behave in a generally unexpected way, and channelling the effects of political programmes in unintended directions.