Unemployment benefits, activation and the interaction between levels of government. Experiences with moral hazard in multi-tiered labour market governance systems

There are some who consider supranational unemployment-based automatic stabilizers to be advantageous for the Euro area and the European Union at large (Deinzer 2004; Dullien 2007, 2012, 2014; French Ministry of Finance and Public Accounts 2014; see Figure 1). An E(MU)-wide unemployment benefit scheme could function as an automatic stabilizer but it could also create awareness amongst European citizens for the efforts and the advantages of the Union and it could reinforce convergence of social models. This paper focusses on stabilisation purposes and investigates issues of moral hazard. Even though the political climate in Europe is very hostile to further integration – in some countries more so than others – it would be wise to consider the merits of such proposals as it is the duty for public officials, politicians and researchers to look beyond the problems of today and to contemplate the solutions of tomorrow. If an E(M)U-wide unemployment benefit scheme, or some scheme that reinforces and supports national systems, could actually achieve at least some of the goals stated above, it warrants further investigation. In order to fully appreciate the possibilities and the limitations of a supranational scheme in combination with national schemes, it is paramount to learn from the experiences with actual real world practices of multi-tiered unemployment systems. Nearly everywhere in the European Union, but also in other Western countries, unemployment schemes are already multi-tiered in some form or another. Moreover, there is a strong European tendency to decentralise unemployment administration, social assistance and activation of the unemployed (Van Berkel & Borghi 2008, Wieshaupt 2010, Mosley 2011). It is crucial that, before we even think about adding another layer on top of existing unemployment schemes, we understand the realities and experiences of the (interaction between) existing layers. This paper will focus on the decentralisation efforts and the experiences with multi-tiered systems of unemployment benefits, social assistance and activation that exist today in order to explore the issue of moral hazard. The current European trend of decentralisation is very much linked to activation and moral hazard. The issue of moral hazard is especially relevant for the solidarity among contributors of any unemployment related scheme. This is one of the reasons for enacting activation systems. Passive labour market policies, administrating and disbursing cash benefits, are policies that are often executed at the central level. But the transition from passive to activating unemployment systems requires governments to have more intimate knowledge of unemployed individuals (Van Berkel & Borghi 2008). Activation, in this line of reasoning, requires tailor-made policies and the capacity to administer and monitor those policies. This logic mandates a decentralisation of labour market policies to local governments (OECD 2003: 12-17, Knuth & Larsen 2010). But besides the effort to bring activation closer to the unemployed, there are also other reasons for a multi-tiered system. Because there is a variety of motivations behind multi-tiered systems it does not come as a surprise that there are different forms of decentralisation. Bredgaard and Larsen try to bring order in the multitude of questions considering multi-tiered schemes and reforms. They identify two main dimensions: formal policy and operational policy (Table 1). Formal policy reforms concern the actual content of policies, whereas operational policy reforms deal with the relationship and the responsibilities of actors: who implements policy, who is responsible and to whom? Such questions are exactly the type of questions that are relevant for understanding the possibilities and limitations of multi-tiered systems. Therefore, the main focus of this paper will be on operational policy reforms. In practice, the difference between those two dimensions might not be so clear-cut. This paper will investigate different forms of multi-tiered labour market governance systems to draw lessons for possible E(M)U-wide employment based automatic stabilizers – and especially it will review experiences with issues of moral hazard. Different forms of multi-tiered governance relate to possible European schemes in different ways. First of all, the federal form of labour market governance decentralisation of the United States forms the inspiration for the works by Dullien. Arguably, the way in which the American states and the federal level relate to each other is more akin to the relationship between the member states and the supra-national level of the EU than how municipalities and centralized governments relate to each other. The relation between the American states and the federal government (the leeway they enjoy in labour market governance) but also the size and demographic characteristics resemble the EU member states more closely than the characteristics of municipalities do. In order to assess whether we can draw any lessons from the U.S. experience we need to understand the institutional dimension of the U.S. experience. Secondly, the way in which municipalised or regionalised EU member states deal with issues of moral hazard might provide valuable insights for any policymaker contemplating supranational schemes. The European experiences are, thus, very relevant as well. Thirdly, any European scheme needs to take account of the variety of labour market governance in the European Union itself. In other words, the design of an E(M)U-wide scheme should accommodate or at least recognise the variety of its member states. This paper itself does not represent the full diversity of EU member states, it only deals with a subset of the possible range of constellations. This paper will proceed in the following manner. Firstly, a theoretical framework will be constructed in order to understand the basic concepts inherent to multi-tiered labour market governance systems. Secondly, this theoretical framework will be used to select cases which represent the different forms of multi-tiered governance models. Thirdly, the institutional framework of the cases will be analysed. The insights gained from the cases will be combined with the theoretical framework in the ‘results’ chapter. Finally, the conclusions and pointers for further investigation will be outlined in the last chapter.