deﬁning inequality economics of eu integration

Economics of EU Integration

Lecture 8Inequality in the EU

Stephen Kinsella

Dept. Economics, KBS, [email protected]

November 2, 2009

Stephen Kinsella (UL) EC4333 November 2, 2009 1 / 26

Today

1 Defining Inequality

2 Social Policy & Employment Strategies

3 CAP, Inequality & Reforms by 2013

Admin: Problem set 2 due Tuesday of week 11; sample exam up.


Part I

Inequality in the EU


Inequality is...

Definition (Income inequality)

The ratio of total income received by the 20% of the population with thehighest income (top quintile) to that received by the 20% of thepopulation with the lowest income (lowest quintile).

See http://www.eurofound.eu.int/areas/qualityoflife/eurlife/index.php.

EMU improves economic performance, but is also associated withhigher inequality and lower social spending

Why?

Bertola (2007) found inequality variation associated with EMU is fullyaccounted for by changes in social policy expenditure as a share ofGDP. See http://voxeu.org/index.php?q=node/600.

Notion of ‘inequality tolerance’


How bad is it?

Figure: Inequality in EU over time. Source: Bertola, (2007)


Gini for EU-27Recall: GINI = 0, equal, GINI = 1, unequal. Lowest is Sweden with 0.23, highest isPortugal with 0.39.

0.22 to 0.24 0.28 to 0.3 0.34 to 0.36

0.24 to 0.26 0.3 to 0.32 0.36 to 0.38

0.26 to 0.28 0.32 to 0.34 0.38 to 0.4

Figure: Gini for EU-27. Lower means more equal. Source:www.wolframalpha.com.

Look at GINI a different way

0 5 10 15 20 25

0.25

0.30

0.35

0.40

rank

Giniindex

rank curve

Figure: Ranked plot of Gini coefficients.


Part II

Social Policy in the EU


Defining Social Policy

Social Policy

Social policies include the various measures to regulate the labour marketbut also measures to combat poverty and social exclusion, and to improveeducation, training, housing and health care.

Treaty of Rome lays the foundations:

1 Free movement of workers (Articles 48–51);

2 Improvement in working conditions and in standards of living (Articles117–128);

3 Equal opportunities for men and women (Article 119); and

4 The creation of the European Social Fund (Article 123).


EU Employment Strategy

To develop a co-ordinated strategy of the member states towardunemployment;The commitment to achieving a high level of employment isrecognised as one of the key objectives of the EU;Employment is a matter of common concern;Member states and the EU were obliged to work together indeveloping a co-ordinated strategy towards employment;The ’mainstreaming’ of employment policy, which must be taken intoaccount in the formulation of all EU policies and strategies;Establishment of an Employment Committee to play a part in theseprocesses and serve as a forum for debateDecisions on employment policy are to be taken by a qualifiedmajority.

Looking good: Employment of women in the EU(27) rose from 53.7 percent in 2000 to 57.3 per cent in 2006, just above the Lisbon target of 57per cent for 2005, but still below the Lisbon target of 60 per cent for 2010.


Social Protection Expenditure

EU27 spent 26.9% of GDP on social protection. (Highest ratios in France,Sweden, Belgium). See Social protection in the European Union - Issuenumber 46/2008 Functions of social protection.

1 Sickness/health care: income maintenance and support in cash inconnection with physical or mental illness.

2 Family/children: support in cash or kind (except health care) inconnection with the costs of pregnancy.

3 Disability: income maintenance and support in cash or kind (excepthealth care) in connection with the inability of people with physical ormental disabilities to engage in economic and social activities.

4 Old age: income maintenance and support in cash or kind (excepthealth care) in connection with old age.

5 Survivors: income maintenance and support in cash or kind inconnection with the death of a family member (e.g. Survivor’spensions).


Social expenditure is big money.

2 46/2008 — Statistics in focus

27.2% of GDP was spent on social protection in 2005

In 2005, gross average expenditure on social protection (see methodological notes) accounted for 27.2% of GDP in the EU-27 countries (see Figure 1 and Table 1).

In 2005, the EU-27 countries with average or above-average ratios (27.2% or more) accounted for 39.6% of the EU population, the group with between 22.3% and 27.2% accounted for 30.0% of all EU inhabitants, and those spending between 17.4% and 22.3% of their GDP on social protection for 21.9%. Countries that spent less than 17.4% of

their GDP on social protection accounted for only 8.5% of the EU population.

The countries with the highest ratios - Sweden (32.0%), France (31.5%), Denmark (30.1%), Belgium (29.7%), Germany (29.4%), Austria (28.8%) and the Netherlands (28.2%) - spent more than twice as much (in relation to GDP) as the three countries with the lowest ratios, namely the Baltic countries: Latvia (12.4%), Estonia (12.5%) and Lithuania (13.2%).

There was a large difference between countries in terms of expenditure on social protection (in PPS* per capita)

If social protection expenditure is expressed in terms of per capita PPS (purchasing power standards), the differences between countries are more pronounced (see Figure 2).

Within the EU-27, Luxembourg had the highest expenditure in 2005 (12 946 PPS per capita)1, followed by Sweden and Denmark (more than 8 400 PPS per capita). The average value in these three countries is 8 times higher than in the three EU countries with the lowest expenditure, i.e. Romania (1 088 PPS per capita), Bulgaria and Latvia.

Of the countries outside EU-27, expenditure is highest in Norway (9 525 PPS), just below that of Luxembourg.

The disparities between countries are partly related to differing levels of wealth, but they also reflect differences in social protection systems, demographic trends, unemployment rates and other social, institutional and economic factors.

Figure 2: Expenditure on social protection in PPS* per capita, 2005

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* Purchasing power standards (PPS): unit independent of any national currency that removes the distortions due to price level

differences. PPS values are derived from purchasing power parities (PPPs), which are obtained as weighted averages of relative price ratios in respect of a homogeneous basket of goods and services, comparable and representative for each Member State.

** Data for Portugal refers to 2004 Source: Eurostat-ESSPROS

1 Luxembourg is a special case in that a considerable proportion of benefits are paid to people living outside the country (primarily

expenditure on health care, pensions and family benefits). If this particular feature is left out of the calculation, expenditure falls to approximately 10 902 PPS per capita.

Figure: % Overall social expenditure in the EU-27


Breakdown of social expenditure in the EU

Statistics in focus — 46/2008 3

Social protection expenditure as a percentage of GDP has remain stable since 2003 Looking at the EU-15 countries as a whole (for which data is available dating back to 1990), social protection expenditure as a percentage of GDP fell to 27.0% by 2000 after peaking at 28.7% in 1993. From 2001 to 2003, this ratio rose continuously to reach 27.8% in 2005 (see Table 1). However, social protection expenditure as a percentage of GDP has remained stable in the EA-13, as well as in the EU-15 and the EU-25 since 2003. This stability seems to be due to the difference between countries such as Germany, Austria, Poland and the Czech Republic on the one hand, where social protection expenditure as a percentage of GDP fell between 2003 and 2005, and countries such as Belgium, Ireland, France, Italy and Spain on the other hand, where social expenditure as a percentage of GDP rose continuously from 2000.

Between 2000 and 2005, expenditure on social protection as a percentage of GDP in the EU-25 was about 0.4 percentage points lower than in the EU-15.

Social protection expenditure goes to areas that either are not particularly affected by the economic situation (such as health expenditure and pensions) or are in fact counter-cyclical (unemployment or social exclusion).

Since 2000, in countries which continued to show strong GDP growth (Estonia, Latvia, Lithuania, Poland, Slovenia and Slovakia), the share of social protection expenditure in GDP has decreased.

In 2005, out of the total EU-27 expenditure on social protection (see Figure 3), social benefits accounted for 96.2%, administration costs for 3.1% and other expenditure for 0.7%.

Table 1: Expenditure on social protection (as % of GDP) 2000 2001 2002 2003 2004 2005

EU 27 : : : : : 27.2EU 25 26.6 26.8 27.1 27.4 27.3 27.4 Figure 3: Structure of social protection expenditureEU 15 27.0 27.1 27.4 27.8 27.7 27.8 in EU-27, 2005EA 13 26.8 26.9 27.4 27.8 27.8 27.8BE 26.5 27.3 28.0 29.1 29.3 29.7BG : : : : : 16.1CZ 19.5 19.5 20.2 20.2 19.3 19.1DK 28.9 29.2 29.7 30.9 30.9 30.1DE 29.3 29.4 30.0 30.3 29.6 29.4EE 14.0 13.1 12.7 12.6 13.1 12.5IE 14.1 15.0 17.3 17.8 18.2 18.2EL 23.5 24.1 23.8 23.6 23.6 24.2ES 20.3 20.0 20.3 20.4 20.6 20.8FR 29.5 29.6 30.4 30.9 31.3 31.5IT 24.7 24.9 25.3 25.8 26.0 26.4CY 14.8 14.9 16.2 18.4 17.8 18.2LV 15.3 14.3 13.9 13.8 12.9 12.4LT 15.8 14.7 14.1 13.6 13.3 13.2LU 19.6 20.9 21.6 22.2 22.3 21.9HU 19.3 19.3 20.4 21.1 20.7 21.9MT 16.5 17.4 17.5 17.9 18.4 18.3NL 26.4 26.5 27.6 28.3 28.3 28.2AT 28.1 28.4 29.0 29.3 29.0 28.8PL 19.7 21.0 21.1 21.0 20.1 19.6PT 21.7 22.7 23.7 24.1 24.7 :RO 13.2 13.2 13.4 12.6 15.1 14.2SI 24.6 24.8 24.8 24.1 23.7 23.4SK 19.3 18.9 19.0 18.2 17.3 16.9FI 25.1 24.9 25.6 26.5 26.6 26.7SE 30.7 31.2 32.2 33.2 32.7 32.0UK 26.9 27.3 26.2 26.2 26.3 26.8IS 19.2 19.4 21.2 23.0 22.6 21.7NO 24.4 25.4 26.0 27.2 25.9 23.9CH 26.9 27.6 28.5 29.1 29.3 29.2

Survivors4.3%

Housing2.2%

Social exclusion

1.2%

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7.7%

Unemployment5.8%

Admin. costs3.1% Other

expenditure0.7%

Old age39.9%

Disability7.6%

Sickness/ Health care

27.5%

Social benefits 96.2%

* The ratio EU27, EU25, EU15 and EA13 for 2005 is calculated with the 2004 data for Portugal Source: Eurostat-ESSPROS

Growth rate in per capita expenditure at constant prices fell in 2005 Per capita social protection expenditure at constant prices has increased steadily since 2000: in the

EU-25 it increased by an average of 2.1% per annum over the period 2000-2005 (see Table 2).

Figure: Breakdown of social expenditure in the EU. Source: Eurostat


Social transfers matter for poverty removal, 2006

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Figure: Social transfers by country in the EU-27 as a % of GDP in each country.Source: Eurostat


Part III

Routes out of Inequality


BabiesRemember Solow

(Mathematica Example)

174

EUROPE’S DEMOGRAPHIC FUTURE: FACTS AND FIGURES ON CHALLENGES AND OPPORTUNITIES

Figure 9 shows the different patterns of fertility decline in Europe. The drop in fertility took place firstly in Northern and WesternEurope, and was followed by Southern Europe with almost a 10 year delay and with a 20 year delay for Central Europe. Despitethese time lags fertility in Southern and Central Europe is today lower than in Western and Northern Europe. This means that thevarious parts of the EU are basically following the same transition albeit with important phase differences.

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Figure 9 Fertility trends in the EU between 1960 and 2003

Source: Eurostat.* Level needed for the replacement of generations.

Total fertility rate, 1960-2003

Central Western Europe Central Eastern Europe

Central Northern Europe Central Southern Europe


Part 3 – GREEN PAPER ‘CONFRONTING DEMOGRAPHIC CHANGE: A NEW SOLIDARITY BETWEEN THE GENERATIONS’

Figure: Source: Eurostat 2008, Europe’s demographic future: Facts and figures,Policies


And again:

174


Figure 9 shows the different patterns of fertility decline in Europe. The drop in fertility took place firstly in Northern and WesternEurope, and was followed by Southern Europe with almost a 10 year delay and with a 20 year delay for Central Europe. Despitethese time lags fertility in Southern and Central Europe is today lower than in Western and Northern Europe. This means that thevarious parts of the EU are basically following the same transition albeit with important phase differences.

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Figure 9 Fertility trends in the EU between 1960 and 2003

Source: Eurostat.* Level needed for the replacement of generations.

Total fertility rate, 1960-2003

Central Western Europe Central Eastern Europe

Central Northern Europe Central Southern Europe


Part 3 – GREEN PAPER ‘CONFRONTING DEMOGRAPHIC CHANGE: A NEW SOLIDARITY BETWEEN THE GENERATIONS’

Figure: Source: Eurostat 2008, Europe’s demographic future: Facts and figures,Policies


Important trends

1 Gender Equality and Family situation

2 Ageing and the Labour Market

3 Education, R&D, Productivity

4 Migration & Integration

5 Sustainability of Public Finances and Social Protection

See: Economic Policy Committee and European Commission (2006), ‘Theimpact of ageing on public expenditure: projections for the EU-25 MemberStates on pensions, health care, long-term care, education andunemployment transfers (2004-50)’ in European Economy Reports andStudies, No1.


Education

“The race between technology and education” determines incomeinequality.Idea: increase supply of highly educated workers, reduce income inequalityover time.See Claudia Goldin and Lawrence Katz The Race between Education andTechnology, Harvard University Press, 2008


Public Service Provision

Discuss in Class

Raising and indexing to inflation the minimum wage, enhancing EarnedIncome Tax Credits, and expanding and improving public services ought tobe our top priorities for boosting the incomes and living standards of Irishcitizens in the lower half of the income distribution


Part IV

The CAP and Inequality


The CAP

1 Initially a price support mechanism

2 Mansholt Plan (1968); Series of reforms 1970’s and 1980’s

3 MacSharry reforms & Agenda 2000, Fischler reforms

Rural development measures 2007-2013.

1 Competitiveness

2 Land Management

3 Wider rural development

4 Training and skills


Spending by product group, 2007

arablesugarolive oilother veg.productswinemilkbeefother animal productsSerie 9

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Figure: Spending by product group, 2007


CAP changes after 2013Biggest.Row.Ever.

Increased co-financing by member states

Making regionalisation mandatory;

Increased compulsory modulation;

An end to milk quotas;

Improved management of risk;

De-gressivity of direct payments (a fixed percentage decrease over aspecified interval of time);

Ceilings/caps on transfers to individual farms, and cancelling those offarms below a minimum size.

Continued promotion of biofuels

See Colman, D.‘The Common Agricultural policy’, in Artis, M. andNixson, F. (eds), The Economics of the European Union. Policy andAnalysis, 4th ed., Oxford University Press, 2007.


CAP & Enlargement

(See handout)


Next Time

Enlargement: Political Economy of accession to the EU, capital marketintegration.

Baldwin & Wyplosz, Chapter 19

* Estrin, S. and Holmes, P. Competition and Economic Integration inEurope, pp. 1–22. 337.142 EST

Smith, E. ‘EU Competition Policy Without Membership: Lessons forthe European Economic Area’, in Estrin, S. and Holmes, P.Competition and Economic Integration in Europe, pgs. 48–60.337.142 EST

Willem H. Buiter and Anne C. Sibert, ‘Eurozone Entry of New EUMember States from Central Europe: Should They? Could They?’


deﬁning inequality economics of eu integration

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