Strategic Interaction among EU Governments in Active Labor Market Policy-making
| Author | Robert J. Franzese,Jude C. Hays |
| DOI | 10.1177/1465116506063705 |
| Published date | 01 June 2006 |
| Date | 01 June 2006 |
| Subject Matter | Articles |
Strategic Interaction among
EU Governments in Active
Labor Market Policy-making
Subsidiarity and Policy Coordination
under the European Employment
Strategy
Robert J. Franzese, Jr.
University of Michigan, USA
Jude C. Hays
University of Illinois, USA
ABSTRACT
The European Union (EU) recently committed to becoming
‘the most competitive and dynamic knowledge-based
economy in the world.’ Active labor market (ALM) policies
are a critical part of the European Employment Strategy
(EES) – the plan designed to achieve this objective. ALM poli-
cies entail several possible externalities that, spilling across
national boundaries, may create incentives for European
governments to free ride off the efforts of their neighbors.
We provide empirical evidence that the national best-
response functions for ALM spending (worker-training
programs in particular) are indeed downward sloping; an
increase in expenditures in one country decreases equilib-
rium expenditures in its neighbors. Therefore, levels of ALM
spending may well be too low, notwithstanding the mildly
increasing coordination fostered through the EES frame-
work. Stronger enforcement procedures may be necessary
if the European Union is to achieve its EES objectives.
167
European Union Politics
DOI: 10.1177/1465116506063705
Volume 7 (2): 167–189
Copyright© 2006
SAGE Publications
London, Thousand Oaks CA,
New Delhi
KEY WORDS
active labor market
policies
European employment
strategy
spatial econometrics
strategic policy
interdependence
Five years ago at the Lisbon Summit the European Union committed to
becoming ‘the most competitive and dynamic knowledge-based economy in
the world by 2010’ (European Council, 2000: 1). Active labor market (ALM)
policies are a critical part of the European Employment Strategy (EES) – the
plan designed to achieve this objective. ALM programs are supposed to
improve job seekers’ prospects of finding employment and increase the
productivity and earning potential of workers. They include spending on
public employment, labor market training, and other policies intended to
promote employment among the unemployed. Although ALM policies –
particularly training and education programs – seem almost inherently
necessary to create the kind of workforce and economy EU leaders envisage,
coordinating these policies through an EES system that relies heavily on the
principle of subsidiarity may be problematic. Subsidiarity in the EES implies
that member states create their own programs and implement them on a
mostly voluntary basis, yet individualistic voluntarism leaves policy suscep-
tible to positive-externality-induced underinvestment. Has this theoretically
possible negative interdependence of European ALM policies actually arisen
empirically? If so, are these spillovers and the detrimental interdependence
they induce sufficiently sizable to warrant concern and redress?
We argue and present evidence that ALM policies do indeed entail signifi-
cant externalities that spill across national boundaries and that, apparently,
these spillovers are sufficiently sizable to generate appreciable political and
economic incentives for European governments to free ride off the efforts of
their neighbors. That is, we provide empirical evidence that the national best-
response functions for ALM spending (worker training programs in particu-
lar) are statistically significantly and substantively appreciably downward
sloping: an increase in expenditures in one country decreases equilibrium
expenditures in its neighbors. This leads us to conclude that current levels of
ALM expenditures may indeed be too low and that, apparently, the limited
(although increasing) coordination of the EES framework is insufficient to
internalize positive ALM policy externalities noticeably. Stronger enforcement
procedures would seem to be necessary if the European Union is to achieve
its EES objectives.
The paper structures these explorations as follows. In the first section, we
briefly review the history of the EES, starting with the Luxembourg Jobs
Summit. We then cover the generic theory of strategic policy complementar-
ity and substitutability (negative and positive externalities, respectively). The
third section contains our empirical analysis, and sections four and five
discuss the results and offer our conclusions, respectively.
European Union Politics 7(2)
168
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