Why work is not a panacea: a decomposition analysis of EU-15 countries

Abstract

Increasing the level of labour participation is one of the key objectives of the European Employment Strategy and the Lisbon agenda. Increasing the employment rate is generally considered crucially important to safeguarding the sustainability of the welfare state and achieving a number of other socio-economic objectives. This article examines the extent to which higher employment does result in lower unemployment, lower poverty rates, decreased dependence on social security and reductions in public expenditures on social protection. To this end, a decomposition analysis is performed concerning the evolution of the unemployment rate, poverty rate, benefit recipiency rate and social expenditure rate in the 15 original EU member states and the United States since the 1980s. Results of this analysis show that, in many cases, the favourable effects of increases in employment are partially (and sometimes even fully) offset by simultaneous changes in other variables, including labour supply, eligibility criteria, benefit generosity and the concentration of non-working people in work-poor households. The article concludes that increasing the employment rate is not a panacea for all socio-economic ills. European social policy should therefore focus less one-sidedly on employment and should address additional objectives, including benefit generosity and poverty. In addition, the process of benchmarking in the EU should be transformed from its current top-down character to one which proceeds from the bottom up.