Association for Public Policy Analysis & Management

The Global economic crisis of 2008 affected daily lives, causing sudden increases in various social problems such as increased unemployment. There were, however, some exceptions where certain nations were more resilient than others in dealing with economic troubles; growth rates came back in a relatively shorter time, and unemployment remained steady or not too much changed during the recession. It was clear that some countries were better prepared to deal with the economic crisis, and able to manage a faster recovery, therefore reducing the social troubles to a minimum.

This global level crisis has brought re-thinking of the role of government. To act as a risk manager against internal and external threats, the government may take a role in buffering the system from increased unexpected risks and crises due to high uncertainty and complexity. To respond, governments can focus more on establishing a sound social safety net by focusing more on labor market policies.

The study attempts to unfold the effects of government expenditure on labor market policies and their impacts and roles in dealing with the unexpected risk (such as the 2008 recessions). The study is divided into two research questions: 1) How does government expenditure on active labor market policies relate to the unemployment rate?; and 2) How does government expenditure on active labor market policies before crisis relate to the resilience (change of unemployment rate after crisis)? This paper examines the effects of government expenditure on labor market policies and their impacts and roles in dealing with the 2008 recessions, based on the fixed-effect analysis utilizing panel data of OECD countries from 2002 to 2011

The study proves the important role of preventive policy makings for sudden economic troubles, as opposed to contingency plans, make big differences. Countries with larger labor market spending showed more resilience on their economic conditions during the crisis, such as a lower rate of unemployment after initial the crisis by comparing countries with smaller labor market spending. The results also show that countries with a larger active labor market-spending shows more resilience on their socioeconomic conditions with having low unemployment rates.

Results of this study provide two policy objectives: 1) We need to understand the important role of government as a risk manager during unexpected crises; and 2) Policy makers can improve their country’s ability to cope with or bounce back from external shocks (resilience) by prioritizing resources in accordance with societal change.