In Belgium, underutilization of labor imposes a heavy burden on government expenditure. The labor market displays a lack of flexibility, suggesting not only policy-induced distortions but also structural problems. The number of persons receiving some form of unemployment benefit has been rising steadily since 1980; the nonemployment rate is very high; there are large regional disparities in unemployment; female and youth unemployment are prevalent; and long-term unemployment is significantly higher than in other industrial economies. This paper assesses the effectiveness of recent labor-market initiatives in Belgium in the light of these characteristics.
Cross-country evidence suggests that the generosity of long-term unemployment benefits helps to explain the prevalence of long-term unemployment. High, long-term unemployment in turn helps to explain low participation rates. Many more people receive unemployment insurance than are unemployed and actively seeking work, yet unemployment benefits are not means-tested, whereas the income support system is. Employee and employer tax wedges in Belgium are also higher than in other industrial countries. In addition, there is some evidence of a mismatch in the labor market. Relative to other industrial countries, Belgium spends a higher proportion of its labor market expenditure on passive measures, such as unemployment compensation, and less on active measures, such as training.
Recent government measures to limit the duration of unemployment benefits and tighten eligibility have helped to alleviate the labor market problems. The initiative that could have the most significant impact on the labor market is the plan d’ accompagnement. By providing and monitoring an action program for those who are on the verge of becoming long-term unemployed, the plan could help to prevent long-term unemployment and reduce the nonemployment rate. Furthermore, by providing targeted training, this initiative could help to reduce mismatches in the labor market.
However, these initiatives are unlikely to rectify the underlying problems. Further measures are needed to ensure that Belgium will not face a supply constraint when the economy recovers. Such measures could include separating the unemployment compensation system from income support; reducing the generosity of long-term benefits; tightening the provisions for claiming part-time unemployment compensation; extending the plan d’accompagnement to more of the unemployed and making its provisions more specific, particularly with regard to training; and reducing employee and employer tax wedges.