Decentralisation of active labour market policy: The case of Swedish local employment service committees

Decentralisation of decision-making in labour market policy may increase efficiency, since local authorities have first-hand knowledge about local labour market problems. However, decentralisation may also be associated with fiscal externalities generating misallocation. The purpose of this study is to examine the effects of a Swedish pilot programme in 1996, which strengthened the role of the local authorities in labour market policy in certain regions. Our econometric findings do not indicate any increase in geographical lock-in of the unemployed, but decentralisation seems to spur local initiatives in the form of projects organised by the municipalities and increase targeting on outsiders in the labour market. The latter result is consistent with the hypothesis that municipalities used their increasing influence in order to improve municipal budgets at the expense of the central government.