Active or Passive? Reforming Employment Benefits in the OECD

AbstractThe last three decades witnessed attempts to reduce employment benefits in many OECD countries. This study distinguishes between three types of benefits: employment protection legislation (EPL), active labour market policies (ALMPs), and unemployment compensation. Using structural equation modeling, the study systematically examines the determinants of these benefits in 23 countries (1985 to 2008). The analysis contributes to the welfare state literature in at least three ways. First, it goes beyond studies of individual programs or overall "welfare effort" by examining three programs simultaneously. Second, it uncovers both direct and indirect channels of support for these programs. Finally, the analysis reveals, contrary to previous findings, that strict employment protection is quite compatible with more spending on ALMPs and unemployment compensation in some countries.Keywords: unemployment benefits, compensation, EPL, ALMPs, globalization1. IntroductionAdvanced industrialized democracies witnessed high levels of unemployment and slow job growth in the last three decades (Mares, 2004, 2006). To address this situation, countries can increase funding for such programs as unemployment compensation (also known as replacement rates) and active labour market policies (ALMPs) (Note 1). Yet the current climate of globalization is said to pressure countries to reduce social benefits. In this climate, it is worth asking what programs can be more easily funded.This study examines possible trade-offs among competing employment insurance programs. While numerous scholars have examined reforms to social benefits in the OECD (e.g., Huber & Stephens, 2001), these studies either evaluate overall spending or track particular programs (cf. Swank & Martin, 2001; Martin & Swank, 2004), downplaying the possibility that the existence of one program may affect another serving a similar need and/or constituency. In contrast, this paper studies the determinants of three employment insurance programs simultaneously, reflecting the reality that politicians and interest groups must consider what resources to allocate to a menu of programs.Building on the distinction between employment protection (EPL) and unemployment benefits (unemployment compensation and ALMPs), the paper demonstrates that EPL is quite compatible with generous funding for unemployment benefits in certain countries. The findings carry considerable import for at least three reasons. First, employment protection has declined in recent decades in many OECD countries, particularly in the more regulated ones (Organisation for Economic Co-operation and Development [OECD], 2006), raising the possibility that similar trends have affected funding for unemployment benefits. Secondly, a number of important works predict that levels of EPL would have to decline for spending on unemployment benefits to increase. If one were to find instead that the relaxation of employment protection has not affected spending on unemployment benefits, this would demonstrate resilience on part of the welfare state in advanced democracies. Finally, it is important to ascertain if ALMPs and unemployment compensation are being funded at similar levels. Unemployment compensation - a passive labour market policy, merely replaces income at a specified level and for a predetermined period (Huo, 2009), which could make it more difficult to fund than ALMPs (Note 2).The findings also shed light on a debate between competing explanations of social policy in advanced democracies. Students of labour politics, for example, see labour market insiders as the main beneficiaries of high employment protection. Consequently, they regard EPL as an obstacle to more funding for unemployment benefits. What these scholars have not anticipated is that unions in certain countries support policies that favour both labour market insiders and outsiders. Followers of the varieties of capitalism (VoC) approach, on the other hand, do not regard employment protection as standing in the way of more spending on unemployment benefits. …