Employment and Social Developments in Europe (ESDE) 2024

3. Labour market developments

3.6. Public expenditure on labour market policies and social protection

In the years following the COVID-19 pandemic, total public expenditure remained sustained and then slowly returned to pre-pandemic levels. Overall, in both nominal terms and as a share of GDP, government expenditure increased in 2020 and remained at high, albeit declining, levels in 2021 in response to the economic and social challenges of the pandemic (Chart 1.13, left chart). In 2022, total public expenditure as a share of GDP returned to similar levels to 2012. The areas of public expenditure that experienced the strongest growth during the first year of COVID-19 pandemic were spending on social protection (+2.6pp between 2019 and 2020, to 21.9% of GDP) and economic affairs ⁽³⁵⁾ (including many COVID-19 pandemic-related measures; +1.7 pp, to 6.1% of GDP), and health (+1.0 pp, to 8.0%).%), which reflects the measures put in place to mitigate the socio-economic effects of the crisis as well as the additional demand for healthcare, medical appliances and medicines. In 2022, public expenditure higher than in 2019 included economic affairs (+1.4pp, to 5.8% of GDP), health (+0.6pp, to 7.6%) and housing (+0.4pp, to 1%), while social protection spending as a share of GDP almost fully reverted to its pre-pandemic level (+0.1pp, to 19.4%), mainly reflecting positive developments in the labour market. ⁽³⁶⁾

Public expenditure on labour market policies peaked recently, with the rollout of government programmes to support employment during the COVID-19 pandemic. Expenditure on labour market policies in the EU substantially increased in 2020 compared to earlier years, both in value (EUR millions) and as a share of GDP, reaching a record high of nearly 3% of GDP before decreasing to 2.3% in 2021 (Chart 1.14). Spending on employment incentives also increased, albeit from a much lower level. Participation in activation support peaked in 2020, reaching 46.3 out of 100 people wanting to work (compared to 33.5 out of 100 persons in 2019). Besides income maintenance and support, and spending on labour market services, expenditure on ALMPs focuses mostly on employment incentives and trainings for jobseekers. On a longer period, at the EU level, spending on employment incentives largely increased from 0.1% of GDP in 2010 to 0.2% of GDP in 2021. In contrast, training programmes have experienced a steady decrease in expenditure over the same period, but still make up a relatively sizeable proportion of the EU countries’ spending on ALMPs. For most of the 22 countries with available information, the level of total spending on ALMPs in 2022 returned to similar levels than before the COVID-19 pandemic. Chapter 3 presents more detailed analysis of expenditure on active labour market policies.⁽³⁷⁾

In 2022, expenditure on social protection benefits increased in nominal terms, but decreased in real terms, and as a share of GDP, reflecting positive developments in the labour market. In 2020, social protection benefit expenditure increased by 7.5% in real terms and played a major role in cushioning initial COVID-19 pandemic-related employment losses (Chart 1.15). That year, benefits related to unemployment accounted for the largest share of the increase (+3.5 pp). The growth in social expenditure slowed in 2021 (+0.2%) before falling by 6.0% in 2022 (increase of 2.6% in nominal terms), largely due to a decrease in real terms of benefits related to old-age pensions and survivors’ pensions and health-related benefits, as well as unemployment benefits in a context of recovery and employment growth. Supported by a resilient labour market, the negative contribution of unemployment benefits in 2021 and 2022 stemmed from the tightness of the labour market, the phasing-out of job retention schemes after the pandemic, and unemployed people no longer being eligible. A series of measures between January 2022 and January 2023 sought to support the income of pensioners against inflation (indexation, ad hoc increases, one-off benefits). However, the rise in prices hindered the positive effect of these measures. ⁽³⁸⁾ As a share of GDP, social protection benefit expenditure decreased to 27.2% in 2022, 3 pp lower than in 2020 and 1.5 pp lower than in 2021. Old age and survivors’ benefits represented the highest proportion of social benefit expenditure (46.3%), followed by sickness and healthcare (30.0%), family and children (8.6%), disability (7.0%), unemployment (4.3%), social exclusion (2.6%) and housing (1.3%). At national level, estimated total expenditure on social protection benefits ranged between 11.3% of GDP in Ireland and 32.2% of GDP in France in 2022.⁽³⁹⁾ The significance of social protection benefits is also affected by the large shares of people entitled to such benefits but not claiming them. For instance, national case studies estimated that in Spain, 58% of households entitled to minimum income benefits in 2022 did not request them in Italy, the non-take-up rate of minimum income by eligible households in 2021 was 38.5%, and almost half (46.6%) of potentially eligible households in Belgium remained uncovered in recent years. ⁽⁴⁰⁾