Strategic interaction among EU governments in active labour market policy-making: Subsidiarity and policy coordination under the European Employment Strategy

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 policies 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 equilibrium expenditures in its neighbors. Therefore, levels of ALM spending may well be too low, notwithstanding the mildly increasing coordination fostered through the EES framework. Stronger enforcement procedures may be necessary if the European Union is to achieve its EES objectives.