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IMH_Luigjes-Vandenbroucke-11.7.2016

Institutional Moral Hazard in Multi-Tiered Regulation of
Unemployment
Conference on the Feasibility and Added Value of a European Unemployment Benefits Scheme
Session B – Brussels, 11 July 2016
Vandenbroucke & Luigjes
Introduction
 Concept of ‘institutional moral hazard’ (IMH)
 Caveats
 Factors that contribute to its salience
 (Concern for) IMH in the 8 cases
 General & country specific
 Conclusions
 Minimum requirements
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IMH: definition
 A situation in which an insured person can affect the insured
company’s liability without its knowledge (Barr, 2004)
 Two levels of government (A & B)
 ‘A’ covers a risk that ‘B’ could cover as well
 Policies by ‘B’ influence incidence of the risk
 Asymmetric information
 Examples
 Dumping, parking, creaming
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IMH: caveats & nuances
 Our focus: activation & interaction UI – SA
 But, other factors influence the risk of unemployment
 But, there is a broader fiscal context
 IMH is inevitable in insurance
 Danger of over-stressing and over-simplifying
 Perceptions matter
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IMH: factors that contribute to its salience
 Design of schemes
 Generosity for individuals, design of re-insurance, other fiscal mechanisms
 Interaction with other components of the regulation of
unemployment
 Activation policies, Social Assistance
 Local or regional differences
 Heterogeneity in employment rates, differences w.r.t. policy goals
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IMH in 8 cases: general findings
 Concern for IMH plays/played a role in every country case
 However, the extent of (concern for) IMH differs
 Dominant issues differ
 Poor activation
 Perverse interactions with other benefits (Social Assistance)
 Heterogeneity between constituent parts of countries
 Different views on policy goals
 Reforms differ: centralisation vs decentralisation
 Federal/central take-over, more federal/central control or less re-insurance
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IMH in 8 cases: country specific findings (1)
 US
 UI: federal-state cooperation, FUTA, extended benefits
 SA: move away from open-ended funding (AFDC) to block-grant (TANF)
 GER, CHE, AUT
 Common issue: problematic dichotomy SA and UI (also: dumping)
 Different solutions: federal take-over, federal requirements, closing off UI
 DNK
 Reimbursement model
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IMH in 8 cases: country specific findings (2)
 CAN, BEL
 ‘Classic’ IMH: federal benefits, regional activation
 Difference in salience of IMH in UI, different solutions
 AUS
 ALMPs privatised (no intergovernmental dimension)
 Increasingly strict governmental control
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Conclusions
 IMH is inevitable
 But it can be mitigated to a certain extent
 Cost-benefit analysis is required
 Complexity of national systems will be a challenge to EUBS
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Conclusions: minimum requirements
 Most likely candidate to mitigate IMH in EUBS: minimum
requirements
 EUBS presupposes minimum requirements
 Two purposes: optimising stabilisation & mitigating IMH
 Minimum requirements best suited for heterogeneous constituent units
 Less intensive than performance measurement
 Stronger centralisation of regulation of unemployment is not an option
 Allows diversity
 Can build on a precedent in the EU: OMC
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Sources
 Barr, N. (2004), Economics of the Welfare State, New York:
Oxford University Press.
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Unemployment
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