Jean Monnet Center at NYU School of Law


4) The Impact of the EES on Member State Policy

The EES accomplishes its goals by coordinating and changing Member State employment policies. Therefore, to evaluate its impact we must ask how and to what degree it has been successful in altering national policy choices.14

The first place to look for answers is in the comments made by the Commission and the Council concerning progress under the guidelines. Based on what has happened so far, both are generally encouraged, albeit with some reservations. The Joint Employment Report 2000 cautions that the reforms advocated by the EES have an impact over a long time horizon, require sustained efforts, and yield visible effects only over time. Thus, it says, "an overall impact of the European Employment Strategy" is still difficult to identify..." Nonetheless, "a beneficial impact can be detected for specific groups or sectors in case of certain new policies." Thus, Member States are reforming their labor markets and it is possible to see a virtuous cycle being created between "growth- and stability-oriented macroeconomic policies" and "ongoing structural reforms." In the Commission and Council's mid-term review of the process, they conclude:

[The EES has] created a new environment for a coordinated response to employment problems in Europe. This in turn has led to a significant change in policy making both at the European and Member States level, which has accelerated and focused structural reforms of the labour markets, and improved the quality of the employment policies.

They balance this positive assessment with a warning about potential "political risk factors". They note that implementation has been uneven across the four pillars, more involvement by ministries other than labor ministries is necessary, action is lagging in the adaptability pillar, the process has not been well integrated with the budgetary process of the Structural Funds, and public awareness is limited.

To go beyond these general observations, we looked at two areas in which the EES guidelines called for policy shifts at the national level. The first is the effort to move unemployment policies from passive income support measures to active efforts to return the unemployed to the workforce. The second is the move to make taxation systems more employment friendly. We find the EES seems to have led to significant changes in the first area but appears to have had less impact in the second.

Preventative and Active Unemployment Policies

A major goal of the EES's first pillar is to bring about a shift from a passive to an "active" unemployment policy.15 Passive unemployment policy provides a substitute source of income to support unemployed workers until they find new work, active unemployment policy takes positive actions to assist unemployed workers find new jobs. Active policies include training, subsidies for the hiring of the unemployed, public works programs, and job search assistance. They include "preventative" measures that attack the issue of long-term or permanent unemployment by ensuring that workers who lose their jobs maintain their skills and willingness to reenter the job market.

The first two guidelines seek to make policies more preventative. They require that every unemployed person receive a new start in the form of a job, training, retraining, work practice or other employability measure. For the young, this must be done within 6 months of losing their job; for others within 12 months. The third guideline directs Member States to increase the number of persons benefiting from training or other active measures. It requires each Member State to set a target for an increase in such measures. Targets are based on a country's starting position but the minimum allowed is 20%. 16

Our review suggests that there has been real progress under these guidelines. Despite the fact that the guidelines set high standards in this area, many countries have significantly improved their performance.17 Not every country has complied with the guidelines and met the targets and some have sought to define "active" measures in a minimal way in order to show compliance without making major new investments. But even the laggards have made some progress and overall there is real movement towards "active" measures.

There are many possible explanations for the progress seen in this area. There was a substantial policy consensus in Europe about the need for such shifts even before the EES highlighted the issue. Quantitative goals made the review process easier. And the cost of change may be relatively low: States may be able to meet the goals without increased budgetary cost if they reallocate expenditures from passive to active measures.

More employment-friendly taxation systems

The second area we examine is the mandate to make taxation systems more employment- riendly. In every version of the guidelines, there has been one section that calls for the member states if "necessary" to set a target to reduce overall taxes and "where appropriate" to set a target to reduce taxes on labor especially relatively unskilled and low-wage labor. It also mandates examining the possibility of introducing a tax on energy or pollution as a revenue substitute and suggests reducing the VAT on labor-intensive services.18

The Commission had wanted a more ambitious guideline than the final compromise accepted by the Member States. The original proposal focused only on reducing the tax burden on labor and would have required each member state to set a target for such reductions. The European Council weakened this proposal by broadening the focus to include the overall tax burden and by requiring the setting of targets for the overall tax burden only if "necessary" and for taxes on labor only "where appropriate".

- Table 1 -

Country Response to Guideline on Making Tax Systems More Employment Friendly
UK The UK's response to the guidelines was to indicate that it had already lowered income tax rates on low income workers to a limited degree and to emphasize that it had the second lowest rate of non-wage labor costs in the EU. During the first three years, no new reductions in taxes on labor were carried out.
Spain Spain reported on a program begun in 1997--before the EES began--that under certain conditions social security contributions were temporarily reduced on new permanent contracts. In 2000, a .25% reduction in unemployment insurance contributions for all permanent contracts was introduced.
France The new socialist government in France took a range of measures to make the tax system more employment friendly. It began a corporate income tax rebate for each new job introduced, transferred health insurance funding to the CSG (general social security contribution) widening the base and lowering the rate, and removed salaries from the computation of the local business tax. A graduated rebate scheme for social security contributions was introduced and then adapted to work in conjunction with the reduction of the workweek to 35 hours. To pay for this later scheme, taxes on profits were increased and an eco-tax introduced.
Greece Greece expressed skepticism towards reducing taxes on labor because of its threat to budgetary balance and also towards increasing taxes on energy and/or pollution because its impact on business competitiveness. Nonetheless, Greece eventually agreed to introduce an experimental scheme offering a tax rebate equal to 50% of the social security contributions for new workers.
Germany In Germany, the new Social Democratic-Green coalition entered office with proposals to lower taxes more generally and to decrease taxes on labor more specifically. In a major tax overhaul, taxes on low-income workers were scheduled to be reduced in four steps by lowering the lowest income tax rate and increasing the basic allowance. Social security contributions were also decreased with lost revenue being replaced by energy taxes and consumption taxes.
Ireland Ireland as part of its social pacts has reduced income tax rates in exchange for wage moderation. In addition, social security contribution have been reduced for low-income workers and suspended for workers hired off unemployment or under 23 and in their first job.
Netherlands In the Netherlands, there have been major reductions in taxes on labor, especially on low-skill labor, but these were initiated before the EES began.
Finland Prior to 1998, the Finnish government had reduced taxation on labor by FIM 8 billion. In November 1997, the Finnish government decided to implement a further FIM 5.5 billion in cuts. Part of these reductions were compensated for by a FIM 700 million increase in energy taxes, increasing to FIM 3.5 billion after 1998. Beginning in 2000, the government proposed an additional FIM 10-11 billion in cuts some of which will be compensated for by increases in taxes on capital.

Table 1 outlines some of the tax changes that have occurred in selected Member States during the first three years of the EES process. This survey demonstrates that in many Member States taxes on labor have declined. However, the extent of change varies greatly, and some countries have done little. France and Germany show the largest changes, but there is little evidence these changes were caused by the EES. The EES did lead to some experimentation in Greece, but Greece, along with the UK, show the smallest overall change. In Finland, there have been large reductions in taxes on labor and some shifting of the tax burden to energy and capital. These steps continue a trend in Finland of reducing taxes on labor that started before EES. In the area of reducing the VAT on labor-intensive services, eight Member States have applied to reduce the VAT, but implementation is too early to evaluate the impact.

The limited impact the EES appears to be having on tax policy is not entirely surprising. Member States are particularly sensitive to EU interference in national tax policy and have resisted other EU attempts to interfere in this area. Proposals to reduce taxes create political issues if new revenue sources must be found. And the loose wording of the guidelines makes it easier for Member States to resist real change. The guidelines are so broad that they really do not push countries along a clear reform path: they deal with both the tax on labor and the overall tax burden; lack any quantitative targets; and define possible reforms so broadly that countries can easily take credit for changes they are making in their tax code for reasons unrelated to employment creation.

Assessing Impact

No one should be surprised that we found evidence that the impact of EES varies between these two policy areas. Indeed, we chose these two examples because we thought it likely that such differences would exist. And we fully expect that when a comprehensive study of the impact of the EES is done, we will find many such differences. The EES covers a vast range of policy areas. In some cases it asks very little as targets and guidelines set goals that are not too far beyond current practices. In other areas, at least for some countries, the guidelines require very substantial change. Moreover, the nature of the EES' mandate varies from area to area. The guidelines vary in precision and specificity; some set clear targets while others do not.19 Finally, The EES is only one of many forces impinging on domestic policy-makers and the other factors affecting policy in each of the areas will vary from country to country and time to time.

What is needed are more fine-grained and more comprehensive studies. Such work will be immensely aided by the evaluation of the EES' operation to date which the Commission and the Member States are now conducting. To measure the influence of the EES on national policy choice and the employment situation, the Commission has asked the Member States to list all policy changes that have occurred in the areas covered by the guidelines since 1998, assess how well these policies are working, show their impact on the problems they were designed to deal with, and assess the role EES played in any change. Even though evaluation is apparently to be based largely on a self-study by Member States, not an outside appraisal, it will take us a long way towards getting answers to many questions about the impact of the EES.

14 Needless to say, our ability to address this issue is limited. There is little information available on actual change at the national level and while the Commission has launched a comprehensive review of the EES that will shed more light , as of the date of writing material for a real assessment do not exist.

15 While a distinction between passive and active policies can be useful, one should recognize the links between the two types of policies. For example, while workers are taking active steps to obtain jobs, they still require passive support to maintain them until they obtain work. Moreover, maintaining unemployed workers with passive support is particularly important to ensure that workers are not forced to take work that utilizes less than their full capabilities.

16 These first three guidelines are noteworthy because they contain explicit and quantified targets. The Commission is eager is increase the use of "measurable objectives and targets" because they are more visible and objective assessment is possible (European Commission, 2000, p. 6).

17 Targets in these three guidelines were set with a serious intent to change policies in all Member States. While some States had begun to move to active measures before the EES, none had reached all the targets set forth in the first guidelines.

18 Proposals to reduce taxes on labor had existed well before the first guidelines came out at Luxembourg Jobs Summit. In fact, one of the five recommendations at the Essen Summit was to reduce taxes on labor. Thus, the inclusion of such proposals in the guidelines is not surprising.

19 It is important to recognize that the relationship between quantification of targets and robustness of impact may be complex. While it could be that once a target is quantified, the EES will have more impact. But it also might be that quantification is most likely when consensus actually preexists EES intervention.




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