The Politics is in the Detail: How Policy-Makers in Europe Make Use of Employment Subsidies

This blog is based on an article in the Journal of Social Policy.  Click here to access the full version of the article. 

Among policymakers in Europe, publicly funded employment subsidies are an increasingly popular tool to increase the employment or earnings of selected groups of workers. Research on the politics behind these programmes has mostly assumed that they all have largely equivalent designs and purposes. In this article, I try to show that employment subsidies are instead best understood as versatile ‘multi-purpose tools’ of sorts, that policymakers can (and do) use as a means to rather different distributional ends. To understand policymaking of today, policy analysts – whether in academia or elsewhere – may do well to shift focus from how much to how and why such tools are being used.

Relaxing the assumption that all subsidies are equivalent

Over the past three decades, public expenditure devoted to employment subsidies has roughly doubled among EU-15 countries. Many policy analysts view this trend as part of a general convergence among EU countries, with respect to how labour market policy is being designed and which groups are benefitting. However, who benefits from an employment subsidy programme is in fact determined by a long list of intricate design choices, such as whether to subsidise incumbent workers or only new hires, which types of jobs and employers are eligible, and how generous and long-lasting the subsidy is.

With these choices in mind, the assumption in most cross-national studies, that all employment subsidies have equivalent effects and similar political explanations, appears problematic.

Identifying two key trade-offs in subsidy design

My article tries to address this problem by identifying the most important trade-offs that a policymaker faces when designing an employment subsidy programme. These trade-offs turn out to have important distributional consequences that are of relevance to policy analysts. The analysis is based on a public dataset that contains the detailed design settings of hundreds of employment subsidy programmes in Europe, and a method called Multiple Correspondence Analysis. I use this method to identify the underlying design trade-offs, based on how policymakers typically combine various programme settings.

The analysis shows that employment subsidy programmes vary in two key dimensions. First, they vary in the extent to which they are targeted primarily to the ‘outsiders’ in the labour market, rather than the more well-protected ‘insiders’. Second, they vary in the extent to which they are designed to alleviate long-term structural labour market problems rather than short-term cyclical problems linked to economic downturns. The method scores each programme on each of the two dimensions. The figure below plots these scores for 200 employment subsidy programmes in operation across Europe in 2011 and reveals a great deal of design variation.

Cronert - Figure to blog

Four subsidy types with distinct distributional profiles

Next, I use this variation to create a four-fold typology of employment subsidy programmes. Each type refers to one of the four quadrants in the plot. The upper-right quadrant, first, contains structurally oriented subsidies targeted at able-bodied, but unemployed or inactive, workers in an outsider position. I label these Structural-outsider programmes. A typical case is the Austrian Integration subsidy, which is provided for up to three years to encourage new hiring of long-term unemployed, older workers, and women. The upper-left quadrant contains what I call Structural-disabled programmes, such as the Belgian Integration premium. These are long-term or indefinitely renewable subsidies for workers with disabilities.

Programmes in the lower centre-right region, I label Cyclical-general. These are recruitment subsidies that do not restrict eligibility to any particular group of workers, which have short durations and impose few employer requirements. A case in point is the Six-month package launched in the UK during the Great Recession. Towards the lower-left corner is a small cluster of programmes that I call Cyclical-insider programmes, exemplified by the Hungarian Maintenance of existing job programme. Most of these programmes subsidise parts of the labour costs of long-tenured incumbent employees, where these would otherwise have been made redundant due to economic difficulties.

The article goes on to demonstrate how the distributional outcomes of programmes vary systematically across types. For instance, more public expenditure is devoted to each participant in Structural-disabled and Cyclical-insider programmes, presumably because they target groups that are generally perceived as more ‘deserving’.

The politics is in the details – the case of the Swedish Nystartsjobb

My key message is that employment subsidies are best conceived of as ‘multi-purpose tools’ of sorts. In fact, policymakers today often agree that such policy tools may be used, but disagree strongly about how to use them.

The Swedish employment subsidy Nystartsjobb (New start jobs), which I analyse elsewhere, may exemplify this point. Introduced in 2007, it was the first to be launched by a centre-right government, and it was more generous, and available to more workers and employers, than any previous subsidy programme. Also, unlike previous programmes, Nystartsjobb has been more highly regarded by employers than by unions. The new centre-left government that took office in 2014 imposed restrictions on the Nystartsjobb, while adding another subsidy that specifically targeted the predominately public welfare sector. These proposals were applauded by unions, while causing business representatives and the Conservative Party to speak out in defence of the existing Nystartsjobb.

Fast-forward to 2019 and the continued governing of the Social Democrats and the Greens is conditioned on a recent 73-point deal with the Centre Party and the Liberals. The deal binds the government to considerable cutbacks in the publicly organised labour market services. However, it also explicitly safe-guards the Nystartsjobb and even expands its scope to additional private-sector employers. No policymaker appears to question the existence of large publicly funded selective labour market interventions, only who shall enjoy their benefits.

Therefore, to understand labour market policymaking of today, in Sweden and elsewhere, policy analysts may do well to shift focus from how much to how and why these kinds of multi-purpose policy tools are being used.

About the author

Axel Cronert is a Researcher at Uppsala University.

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