Federal Solidarity, Regional Autonomy and Institutional Moral Hazard The case of Belgian unemployment insurance and activation policies

By studying unemployment insurance and activation policies in Belgium, we illustrate a three-way tension between three policy goals: central-level solidarity, subnational autonomy and so-called institutional moral hazard. We develop this framework by analysing how the tensions embedded in is trilemma developed during the devolution that transformed Belgium from a unitary into a federal state. Our analysis, foremost based on 27 interviews with 37 politicians and a series of policy documents. We distinguish three periods starting in the 1980’s that document more in detail the twists and turns of the way in which Belgian federal and regional actors sought new ways of re-balancing these three policy goals. Though this analysis may seem specific to the Belgian case, we conclude that our analysis demonstrates that the tensions we identified in trilemma can occur in all multitiered systems with a potential tension between central-level solidarity and subnational actors that are (perceived to be) able to influence the sustainability of those central systems through their own subnational policies.
The paper shows how the trilemma unfolds as a consequence of political concerns about beliefs about institutional moral hazard. The reorientation of welfare states towards the activation paradigm was associated with the perception that unemployment came to be seen a risk that is heavily influenced by individual behaviour of jobseekers. The decentralisation of activation policies to subnational governments added an institutional intergovernmental dimension to the diagnosis of the risk entailed by unemployment policies. It poses challenges to multitiered welfare states where subnational governments are responsible for activation policies and unemployment benefits remain financed by the central government. In such a context, subnational governments are alleged to have little financial incentive to activate benefit recipients as effectively as possible, and this problem can be framed as a form of ‘institutional moral hazard’. Mitigating this kind of moral hazard can be achieved by reducing central solidarity and/or by reducing subnational autonomy. This poses a set of difficult policy trade-offs for policy makers.
On the other hand, what may appear as a form of institutional moral hazard, might actually be the manifestation of a divergence between the central and subnational governments of the diagnosis of the problem of unemployment and the policies appropriate to cope with this risk. As such, the very diagnosis of moral hazard is crucial to this trilemma and politically contentious.