Institutional moral hazard in the multi-tiered regulation of unemployment in Germany Background paper

This paper has been written in preparation of a research project funded by the European Commission (on the Feasibility and Added Value of a European Unemployment Benefit Scheme, contract VC/2015/0006). This paper adds information and detailed analysis to the following deliverable of that research project: Institutional Moral Hazard in the Multi-tiered Regulation of Unemployment and Social Assistance Benefits and Activation - A summary of eight country case studies; but it was not a deliverable. We use the concept ‘institutional moral hazard’ to analyse intergovernmental relations within multi-tiered welfare states, specifically the domain of in unemployment-related benefits and related activation policies (the ‘regulation of unemployment’). This paper is one of eight separate case studies, it focuses on Germany. Responsibilities in the German regulation of unemployment are divided between the federal government, the federal Public Employment Services (PES) and the local level – with a supervisory role for the regional level. The German system is relatively centralised as a result of reforms aimed at mitigating institutional moral hazard and increasing divergence between activation of unemployment insurance and social assistance caseloads. Specifically, these reforms created a new social assistance scheme, more tightly regulated by the federal government, and placed activation responsibilities within one-stop-shops operated jointly by the PES and municipalities.