Between autonomy and solidarity: Institutional moral hazard in the regulation of unemployment in federal welfare states

This thesis analyzes the interaction between different levels of government regarding unemployment insurance, social assistance and active labor market policies in two federal countries: the United States and Belgium. It conceptualizes intergovernmental relations as an insurance-relationship. Unemployment in a social risk that is partially insured through income-replacement benefits. Different factors influence this social risk, some are exogenous to individual behavior while others are endogenous to individual behavior. Since the 1990s governments have emphasized endogenous factors through active labor market policies that are intended to incentivize job search. This substantive policy shift towards active labor market policies coincided with more (pronounced) intergovernmental interactions. Active labor market policies are, for example, often implemented by subcentral governments while benefits are typically financed by the federal level. Therefore, subcentral policies increasingly influence the risk of unemployment. And when subcentral governments do not bear the financial consequences of their policies, this thesis speaks of ‘institutional moral hazard’; it identifies different forms of, and different solutions to, this policy problem. In Belgium, the federal government initially tried to remedy institutional moral hazard through stricter minimum requirements for regional policy. In contrast, in the US, states were made to finance a larger share of benefits themselves. Both approaches have had their downsides: stricter minimum requirements restrict the autonomy of subcentral governments, and making subcentral governments finance unemployment benefits leads to a collective action problem. Summing up, institutional moral hazard can be mitigated but to some extent is the unavoidable price of a well-functioning system of unemployment benefits