Association for Public Policy Analysis & Management

We study eight countries in which the regulation of unemployment benefits and related benefits (notably social assistance for able-bodied adults) and the concomitant activation of unemployed individuals has a multi-tiered architecture. This survey informs a broader research question on the feasibility of a (hypothetical) European Unemployment Benefit Scheme (EUBS). The introduction of such a EUBS would lead to a multi-tiered benefit structure involving both the EU and its member states. The domestic experiences of the eight cases are useful to understand the issues that might arise as a result of multi-tiered benefit systems, and the types of answers that have been formulated in response. We focus on what we call institutional moral hazard:  institutional moral hazard emerges because of the incongruence of interests of, and asymmetric information between, different levels of government which are involved in the design, implementation and financing of unemployment-related benefits and associated activation policies.

The survey learns that concern for institutional moral hazard inevitably emerges in multi-tiered systems in which a central government can be seen as ‘insuring’ or ‘re-insuring,’ completely or partially, the risk of unemployment for lower levels of government. In this sense, institutional moral hazard is a price to pay for the improved stabilization (and cohesion) effects produced by a layered system of unemployment-related benefits. This trade-off constitutes a normative problem par excellence. Fundamentally, the salience of moral hazard in the public policy debate seems to depend on the generosity (in a broad sense) of the underlying insurance policies, at the level of the individuals, on the level of transfers between the levels of governments involved, and on the readiness to organize ‘federal solidarity’ in the national public culture. With regard to these underlying factors of generosity, solidarity and tolerance for individual and institutional moral hazard, different equilibria seem to exist in different countries. In so far as institutional moral hazard is an explicit public policy issue (whatever the label used to describe it in the public debate), different solutions are visible in different countries.

In most of the countries which we studied, either centralization, a set of  minimum requirements, conditional funding, and/or financial incentives are applied to enhance the activation efforts of lower levels of government.  In some countries, solutions are, at least in part, congenial to new public management methods.  Also, most of the countries under examination launched important reforms over the last 20 years, motivated partly by institutional moral hazard. In some countries, the policy architecture still changes frequently, which underscores the difficulty of striking a balance between conflicting normative perspectives and interests.  On the basis of these observations, we propose a set of conclusions which we consider relevant in the broader debate on the feasibility of a EUBS.