larger markets, smaller welfare states? tito boeri iseo july 8, 2005
TRANSCRIPT
Larger Markets, Smaller Welfare States?
Tito Boeri
Iseo July 8 , 2005
Outline
• Motivations: competitive pressures on redistributive institutions
• Model explaining why these institutions exist and pressures from competition in product markets
• Evidence on competitive pressures on these institutions
• Are there ways to redistribute also in more competitive environments?
• Enlargement means also migration: welfare shopping
It is the responsability of the Government to reduce the differences in income between people with high incomes and
those with low incomes ?(percentage of positive answers)
Source: ISSP and Eurobarometer data
year 1992
0
10
20
30
40
50
60
70
80
European Countries USA Canada Australia N. Zealand
year 1997
0
10
20
30
40
50
60
70
80
90
100
EU countriesincluded in ISSP
survey
Eurobarometerdata on EU
countries includedin ISSP survey
Eurobarometerdata on all EU
countries
USA Canada Australia N.Zealand Japan
Ireland
Portugal
Greece
Spain
Denmark
Netherlands
Austria
Italy
France
Finland
Sweden
Germany
Belgium
ALMPs Unemployment Old Age Disability and Survivors Tax wedges
Social Expenditure as a % of GDP Tax wedges - Income tax plus employee and employer contributions less cash benefits as a % of labour costs
10 20 30 40 501020
Source: Eurostat, Esspros (2000);OECD, Socx (2001); OECD, Taxing wages (1999)
Four social Europe(s)Composition of the social policy budget, Euros per persons
Source: ESSPROS 2004.
Note: unweighted average of countries in each group.
Independent variables coeff. st- err. T-stat.
Gov. sector employment 0.71 0.12 6.03
Unemployment benefits: repl. rate -0.11 0.03 -4.22
Union density -0.07 0.03 -2.67
Corporatism (intermediate) -1.77 0.44 -4.05
Corporatism (high) 0.74 0.41 1.81
Employment protection legislation -1.35 0.71 -1.91
Tax wedge -0.09 0.05 -1.73
Output gap 0.61 0.04 17.1
No. of observations 223No. of countries 19F-test (fixed effects) 129.1 ***
F-test (gov. sect. empl. = 1)1 6.1 **
Each coefficient represents the expected change in the employment rate by an
unitary change in the independent variable.
***: statistically significant at the 1% level; ** at the 5% level; at the 10% level.
1. The null hypothesis is that the coefficient of the gov. sect. employment rate is
equal to 1. The test does not reject the null hypothesis at the 1 per cent level. See Nicoletti and Scarpetta (1999) for more details.
Dis-employment effects of redistributive institutions
Differences in outcomes
0
10
20
30
40
50
60
70
80
90
Den
mar
k
Sw
eden U
K
Net
herla
nds
Fin
land
Aus
tria
Por
tuga
l
Ger
man
y
Cze
ch R
ep.
Slo
vak
Rep
.
Fra
nce
Spa
in
Irel
and
Luxe
mbo
urg
Bel
gium
Gre
ece
Pol
and
Italy
Hun
gary
Employment rate Unemployment/PopulationSource: OECD, 2004
Lisbon Target
A simple model
• Framing the relationship between institutions and employment
• Providing rationale for institutions being in place
• Why do they differ?
• Effects of increased product market competition on employment and institutional tradeoffs
Institutions and outcomes:- motivated by policy objectives (social/protection/...)- under market imperfections
Simple model:
competitive equilibrium: but if attach weight to worker welfare ( total),labor cost markup factor
⇒ lower employment if β small.
lwAlw sd ,
,)(,1
AlAww ds
1
1
1)
11(
)()( Aw
0.2
0.4
0.6
0.8
1
1.2
0.2 0.22 0.24 0.26 0.28 0.3 0.32 0.34l
Distributionally-weighted (bargained) equilibrium
Institutional heterogeneity
• Different ways to implement this (bargained/distributionally weighted) equilibrium
• Tax-wedge between labour supply and demand rebating proceeds to non-employed people (UBs).
• Labour supply reducing policies (e.g., early retirement, disabilities) creating inactivity
• Minimum wages, administrative extension of collective wage agreements creating unemployment
• Employment protection regulations “pricing out” outsiders
For given objective (“β”),
labor demand becomes more elastic
(employment) side effects stronger,
- smaller markup optimal.
1
)/(Al
Effects of increased product market competition
0.2
0.4
0.6
0.8
1
1.2
0.2 0.22 0.24 0.26 0.28 0.3 0.32 0.34l
Effects of increased product market competition
Summarising effects of increased product market competition
• Stronger dis-employment bias of redistributive institutions
• Lower rents – lower wages
• Even more wage restraint if attempt to preserve employment levels wrt to scenario with less competition by reforming the institutions which implement the wage
Testing the empirical relevance
• Looking for natural experiments of increased market pressures
• European integration (Single Market), and EMU as examples. Difficult to disentangle the two effects.
• Double difference approach: EMU vs. non-EMU countries, before and after parity fixing
Lower markups?
• ECHP data (1995-2000)
• Difference between the actual wage (w) and the reservation wage (w*) stated by individuals seeking jobs in the previous wave of the survey
• We expect it to have declined over time and even more so in EMU countries since 1997
0.0
005
.00
1
0 1000 2000 3000Euros
Reservation Wage Wage
Europe 1997-1998
0.0
005
.00
1.0
015
0 1000 2000 3000Euros
Reservation Wage Wage
EMU 1997-1998
0.0
005
.00
1.0
015
0 1000 2000 3000 4000 5000Euros
Reservation Wage Wage
Europe 1998-1999
0.0
005
.00
1.0
015
0 1000 2000 3000 4000Euros
Reservation Wage Wage
EMU 1998-1999
…and pressures on institutional reforms?
• fRDB inventory of labour market and social policy reforms
• Classified by area (EPL,NEB,pensions), direction (more or less protection) and scope (structural/marginal)
EURO AREA
0
0.2
0.4
0.6
0.8
1
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
anni
decreasing flexibility increasing flexibility
NON EURO AUREA
0
0.2
0.4
0.6
0.8
1
1.2
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
anni
decreasing flexibility increasing flexibility
EURO AREA
0
0.2
0.4
0.6
0.8
1
1.2
1.4
anni
decreasing rewards increasing rewards
NON EURO AREA
0
0.2
0.4
0.6
0.8
1
1.2
1.4
anni
decreasing rewards increasing rewards
yearly average n° of reforms in euro-countries
0
2
4
6
8
10
12
14
increasing flexibility increasing rewards
before 1997
after 1997
Structural vs marginal reforms, in EPL (euro area)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
marginal reforms structural reforms
before 1997
after 1997
Political economy of reforms
• There are reforms going in opposite directions: more and less at the same time
• Dealing with political obstacles to reforms• Operating along the institutional tradeoffs :
mobility friendly institutions may be better for turbulent and competitive labour markets
• Unemployment benefits become more effective than EPL in insuring against labour market risk
Efficiency in providing protection against labour market risk
Percentage of employees deeply concerned about job security
0
5
10
15
20
25
ITA
SPA
POR
GRE
NED
UK
IRE
DEN
FIN
AUS
BEL
FRA
GERSWE
0.5
1
1.5
2
2.5
3
3.5
4
0 10 20 30 40 50 60 70 80 90 100
% of unemployed people reporting receipt of benefits
Str
ictn
ess
of
EP
L -
Ove
rall
- V
ersi
on
2 -
Lat
e 90
s
Source of data: Oecd
EU Average
The UB/EPL trade-off
Summarising
• Redistributive policies largely present in europe because they play some useful function for someone
• Their employment costs are larger in larger markets, under stronger competitive pressures
• Need to reform institutions dealing with political obstacles to regulatory changes
Other challenges
• Eastern Enlargement
• Countries too small economically to matter
• Trade: West specializes in productions with high skill content; East in low-skill segments. Both inter and intra-industry. Modest effects on aggregate.
• FDIs: again too small to matter, albeit some plant de-localisation may occur
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
45 000
50 000 100 000 150 000 200 000 250 000 300 000 350 000 400 000 450 000
population
PP
P-G
DP
pe
r c
ap
ita
in
US
$
LUX
DKGER
FRA
ROM
Poland
SpainPOR
GRESLO
CZEHUN
UKITA
EU-15 EU-15 + CEEC-10
PPP-GDP and Population of the EU-15 and the CEEC-10, 1998
Sources: Eurostat, World Bank.
Are fears of mass migration justified?
• Pressures lower than anticipated by public opinion (roughly 3 per cent of the population of the NMS)
• They would go to regions offering more employment opportunies and suffering a lack of workers (with overheated labour markets). Thus no crowding out
• However potential fiscal effects via access to welfare by migrants and ensuing race-to-the bottom in welfare provisions: how serious?
Migration Policies Estimated migration flows to Germany
Migration: the option value of waiting
- 50 000
0
50 000
100 000
150 000
200 000
250 000
300 000
ne
t in
cre
as
e o
f fo
reig
n p
op
ula
tio
n f
rom
CE
EC
-10
p.a
. (p
ers
on
s)
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
fore
ign
po
pu
lati
on
fro
m C
EE
C-1
0 (
pe
rso
ns
)
high scenariohigh scenario
low scenariolow scenario
medium scenariomedium scenario
net increase of migrant population(left axis)
migrant population(right axis)
Migrants “grease the wheels” of European labour markets
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
4,00
4,50
5,00
0,00 2,00 4,00 6,00 8,00 10,00 12,00 14,00 16,00
# unemployed per vacancy
fore
ign
pop
. as
% p
op.1
5-64
Other example: Italian regions
Concerns about “Welfare shopping”
• Migrants receive proportionally more than natives, mainly (but not entirely) because of compositional effects
• Generous welfare also attract unskilled: some “residual dependency”
• And self-selection
22.622.45.718.447.115.4Finland
32.023.93.021.014.25.3Austria
9.0918.818.224.60.02.2Portugal
4.91.74.915.84.96.5Spain
5.73.821.423.61.42.2Greece
20.720.13.4526.83.42.8UK
32.015.310.022.812.67.7France
25.624.515.021.117.410.7Belgium
27.519.63.918.813.76.7Netherlands
25.019.73.121.037.513.0Denmark
NANANANA8.576.96Germany
NON-EU migrants
EUcitizens
NON-EU migrants
EUcitizens
NON-EU migrants
EUcitizens
Country
% receiving family benefits
% receiving old age pension
% receiving UB
Welfare dependency of EU citizens and migrants from non-EU countries
Because of their characteristics (“predicted” dependency)
Country EU NONEU Difference
Germany 0,05 0,06 0,02
Denmark 0,11 0,18 0,07
Netherlands 0,06 0,08 0,02
Belgium 0,09 0,11 0,02
France 0,06 0,07 0,00
UK 0,02 0,03 0,01
Greece 0,02 0,02 0,00
Spain 0,05 0,05 0,00
Portugal 0,01 0,01 0,00
Austria 0,05 0,07 0,02
Finland 0,14 0,17 0,03
Migrants versus natives predicted dependency, Unemployment benefits
Country Pred. EU Pred. NEU Diff.
Denmark 0,028 0,057 0,029
Netherlands 0,056 0,210 0,154
Belgium 0,157 0,170 0,014
France 0,074 0,191 0,118
UK 0,041 0,189 0,148
Greece 0,016 0,018 0,002
Spain 0,007 0,010 0,003
Portugal 0,122 0,165 0,043
Austria 0,198 0,301 0,102
Finland 0,050 0,070 0,020
– Predicted dependence on family benefits
Variable/Country Germany Denmark Netherlands Belgium France
Sex = male -0.05 -0.22** 0.07* -0.24** -0.02
Married -0.2** -0.2** -0.26** -0.136** -0.14**
Age -0.014** -0.045** -0.006* -0.015** -0.00
Experience 0.00 0.018** -0.006* -0.01** -0.03**
Tertiary education -0.076 -0.406** -0.187** -0.583** -0.23**
Secondary Education 0.03 -0.24** -0.144** -0.134** 0.05
Number of Children -0.00 0.048* -0.00 0.06** -0.01
Variable/Country UK Greece Spain Portugal Austria Finland
Sex = male 0.28** 0.11* 0.36** 0.05 0.25** -0.06
Married -0.06 0.11 0.18** 0.167** -0.18** -0.07
Age -0.007 -0.006 -0.00 -0.009** -0.021** -0.027**
Experience -0.01 -0.017** -0.017** -0.003 0.00 -0.00
Tertiary education -0.14 -0.5** -0.48** -0.94** -0.53** -0.45**
Secondary Education -0.06 -0.3* -0.323** -0.267** -0.287** -0.21**
Number of Children - 0.04 0.01 0.034* -0.03 -0.005 -0.03*
Econometric determinants of UB dependency
Determinants of UB dependency
Migration and the Welfare System
Income Income
country 1 country 1
country 2 country 2
skill level skill level
skilled migrants go to country 1 safety net in country 1:unskilled migrants go to country 2 also the unskilled go to country 1
Native incomes at given immigration (1 %)
-0.14
-0.12
-0.1
-0.08
-0.06
-0.04
-0.02
0
0 30 40 50 60
chan
ge
in %
at
imm
igra
tio
n o
f 1%
replacement rate in % of post-tax wage
Impact of benefits on migration from NMS
2.3
2.35
2.4
2.45
2.5
2.55
2.6
2.65
2.7
0 30 40 50 60
replacement rate in % of post-taxt wage
mig
ran
ts in
% o
f h
om
e p
op
ula
tio
n
42
43
44
45
46
47
48
49
50
shar
e o
f m
anu
al w
ork
ers
in %
of
mig
ran
t p
op
ula
tio
n
scale of migration (left axis) share of manual workers (right axis)
Summary of simulation results
– Total gains from migration are large: +0.2-0.4% GDP with migration of 1%
– Most gains accrue however to migrants and their families
– Small gains or losses for natives in receiving and sending countries depending inter alia on assumptions on wage rigidities….
Conflicting effects
• Immigrants are younger and thus tend to positively contribute to the pension system
• Immigrants have more children and this is a drain on educational expenditures and family benefits
• Immigrants are often (but not systematically) more likely to be unemployed
Evidence on“welfare shopping”
• Migrants receive proportionally more than natives, mainly (but not entirely) because of compositional effects
• Generous welfare also attract unskilled: some “residual dependency”
• Any risk of a “race to the bottom”?
Family migration
NPVn
NPVw
NPVn+NPVw
A B
CDE
F
Family reunification policies
• Many EU countries are tightening family reunification policies to reduce the costs of migration
• Yet, un-tying decisions to migrate among family members may actually end-up increasing migration
• Although it would likely reduce access to welfare payments
Country EU citizens non EU citizens
Germany 48.1 39.5
France 47.3 43.7
UK 49.0 40.3
Spain 49.7 42.4
Average age:
Country EU citizens non EU citizens
France 22.0 10.0
UK 26.8 3.45
Spain 15.8 4.9
% Receiving pensions
Average number of children
Country EU citizens Non EU citizens
Germany 0.51 1.05
France 0.57 1.67
Spain 0.53 0.87
UK 0.61 1.46
Country Age EU citizens Age non EU citizens
France 15.3 32.0
UK 20.1 20.7
Spain 1.7 4.9
% Receiving family benefits
% Receiving unemployment benefits
Country EU citizens Non EU citizens
Germany 6.96 8.57
France 7.7 12.6
UK 2.8 3.4
Spain 6.5 4.9
UB generosity and immigrant UB dependency
Country UB generosity UB odds ratio
Denmark 52 2.9
Netherlands 51 2.04
Belgium 43 1.63
Finland 38 3.06
France 37 1.63
Spain 33 0.75
Austria 31 2.7
Germany 28 1.23
UK 18 1.21
Odds ratio for non educated
Country odds ratio
Denmark 1.4
Netherlands 1.85
Belgium 1.3
Finland 0.6
France 1.53
Spain 0.6
Austria 1.24
Germany 1.74
UK 0.67
Policy response
• Restricting (transitorily) Migration?
• Restricting access to welfare?
• Co-ordinating social minima
Restricting migration?
• 2 + 3 + 2 scheme• Race to the top: Austria and Germany will adopt it for 7
years; France and Belgium for 2; Netherlands, Sweden and UK reneging on previous commitment to liberalise, Danish Govt almost collapsed, Greece and Italy likely to treat new citizens just as other non-EU citizens
• risk of distorsions in the spatial allocation of migrants• at odds with the idea of developing a common EU
migration policy• will induce more illegal migration, hence unskilled• better a EU-wide quota at the level of baseline estimates
(roughly 400,000 per year)
Restricting access to welfare?
• As done in the UK and Sweden and recommended in Germany
• Would make assimilation more difficult
• Discourage mobility of Europeans
• Doubtful that it would reduce pressures on welfare systems