Social Policies and Productivity

Juan Pablo Atal and Hugo Ñopo

Goal of the Chapter

To explore the link between:

– Governments’ decisions (regarding labor markets regulation and social protection policies), and

– Productivity (at least labor productivity).

Outline of the Presentation

1. Trying to define the question– A conceptual map for the report and key

definitions– What does the literature say? (some possible

channels)

2. Proposing a way to answer it– Focus on specific channels – Use of two layers of evidence

a. Cross-country regressionsb. Identifying productivity effects of policy-making from

existing natural experiments and social interventions

Outline of the Presentation

1. Trying to define the question– A conceptual map for the report and key

definitions– What does the literature say? (some possible

channels)

2. Proposing a way to answer it– Focusing on specific channels – Two layers of evidence

a. Cross-country regressionsb. Identifying productivity effects of policy-making from

existing natural experiments and social interventions

Conceptual Map (Brief, perhaps incomplete and biased)

Fiscal

- Spending (Social,Infraestructure)

- Taxes

Institutions

GOVERNMENTDECISIONS

HOUSEHOLDDECISIONS

FIRMDECISIONS

Investment,R&D

Hiring (formal/informal)

Legislative

- Labor Market

- InvestmentPromotion

- Final goods

Labor Market

-Supply

- Formality (SS coverage)

- Dependance relationship/entrepreneurship

Unions PRODUCTIVITYAND

GROWTH

Conceptual Map (Brief, perhaps incomplete and biased)

Fiscal

- Spending (Social,Infraestructure)

- Taxes

Institutions

GOVERNMENTDECISIONS

HOUSEHOLDDECISIONS

FIRMDECISIONS

Investment,R&D

Hiring (formal/informal)

Legislative

- Labor Market

- InvestmentPromotion

- Final goods

Labor Market

-Supply

- Formality (SS coverage)

- Dependance relationship/entrepreneurship

Unions PRODUCTIVITYAND

GROWTH

Government Spending and Social Policy

From Public Finance Theory: Government Spending can be classified in(Harris 2002):

1. Public Goods and Services: Pure public goods as national defense and general services as administration, legislation and regulation.

2. Economic Services: Private goods of services prone to natural monopoly or strong externalities. Examples include public utilities and financial support for specific activities such as research and development.

3. Merit goods and services: Quasi-public goods provided on grounds of market failure, externalities or economic justice principles. Examples: education (citizens may ignore the social returns of human capital investment or may have limited access to capital markets) and health care.

4. Social transfers: Transfers providing income support to households whose living standards have declined sharply or those who face exceptional expenses due to old age, disability, sickness, unemployment or family circumstances.

Social

Policy

Outline of the Presentation

1. Trying to define the question– A conceptual map for the report and key

definitions– What does the literature say? (some possible

channels)

2. Proposing a way to answer it– Focusing on specific channels – Two layers of evidence

a. Cross-country regressionsb. Identifying productivity effects of policy-making from

existing natural experiments and social interventions

Social Policy and Labor Productivity: Some Channels

• Direct: education, health

• Intermediary: labor markets regulation, taxation, social protection/security (welfare dependency, non-wage labor costs).

• Indirect: inequality, mobility, social cohesion and trust

Social Policy and Labor Productivity: Some Channels

• Direct– Literature on private return to schooling. An additional year of schooling has a

return tha ranges between 5 and 13% (for a review see Card, 2001). – Long run elasticity of output per capita with respect to human capital in the

range of 0.6 for the OECD (Bils and Klenow (1998), Krueger and Lindahl (2000), Topel (1999), Temple (2000))

– Improvements in labor quality accounts for 30 % of the US productivity residual (Griliches, 1997) and 58 % in Canada (Mun and Ho, 2000)

• Intermediary– Job security policies have a substantial impact on the level and the distribution

of employment in LA (Heckman and Pages, 2000)– Stringent legislation slows down job turnover. Employment and output effects.

(Micco and Pages, 2007) – Welfare dependency: And its effects on formal/informal labor allocation (Levy,

2008)

• Indirect: – Inequality: Controversial and not conclusive empirical and theoretical literature.– Social cohesion and trust: Lack of trust makes harder to do business, increasing

transaction costs (IADB, 2008)

Outline of the Presentation

1. Trying to define the question– A conceptual map for the report and key

definitions– What does the literature say? (some possible

channels)

2. Proposing a way to answer it– Focusing on specific channels – Two layers of evidence

a. Cross-country regressionsb. Identifying productivity effects of policy-making from

existing natural experiments and social interventions

Social Policy and Labor Productivity. Some Channels

• Direct: education, health

• Intermediary: labor markets regulation, taxation, social protection/security (welfare dependency, non-wage labor costs).

• Indirect: inequality, mobility, social cohesion and trust

How answerable are these questions?

• Two layers of evidence

– Layer 1: Cross-country comparisons of, on the one hand, governments’ spending and regulation, and on the other, labor force participation and formality.

– Layer 2: Within-country analysis of

households’ reactions to social policy-making

Layer 1:Crafting a dataset

Source: CEPAL

Social Government Spending 1995[% GDP]

0 5 10 15 20 25

GTM

SLV

ECU

TYT

HON

DOM

PER

NIC

VEN

PRY

MEX

CHL

BOL

COL

CRI

BRA

URY

ARG

EDUCATION

HEALTH

SOCIAL SECURITY

HOUSING

Layer 1:Crafting a dataset

Source: CEPAL

Social Government Spending 2005[% GDP]

0 5 10 15 20 25

GTM

SLV

ECU

TYT

HON

DOM

PER

NIC

VEN

PRY

MEX

CHL

BOL

COL

CRI

BRA

URY

ARG

EDUCATION

HEALTH

SOCIAL SECURITY

HOUSING

Layer 1:Crafting a dataset

Source: CEPAL

Average Social Government Spending [% GDP]

0

5

10

15

20

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

EDUCATION HEALTH SOCIAL SECURITY HOUSING

Layer 1:Crafting a dataset Mapping Social Expenditures

• We have been able to obtain disaggregated data for some countries. Example: Peru

• For others, we had access to data but further intensive work is needed. Example: Nicaragua

• The goal is to disaggregate these expenditures according to formality and poverty status.

Layer 1:Crafting a dataset Labor Market and Investment Promotion

Regulations

• We will use/update Heckman and Pages (2000)

• We will use data from the Doing Business Report

Layer 1:Crafting a dataset The Outcomes

• From RES’ Harmonized Household Surveys (Sociometro) we will create synthetic observations (by birth cohort and possibly other covariates) and compute:– Labor supply

• Participation• Hours of work

– Formality– Entrepreneurship

Yes, we all “love” cross-country regressions…

• But at least, it is one way of comparing many countries in the region.

• And we have the potential of reaching many countries in our sample:

– REAs: with your help!

– Carmen: with your help as well ($$$) .

• Ideal: to measure the OUTPUTS (quality) of social policy and link them to productivity.

• Reality: we will measure the INPUTS of social policy and link them to some labor markets outcomes.

• The heterogeneityheterogeneity of the relationship between social policies and productivity will hardly be captured.

Layer 2: Reviewing the Literature

• Camacho and Conover (2008): Exploits the variation in fraction of interviews taken after social program reforms conducted for the Census of the Poor, within a municipality and across time to assess its effect on formal/informal allocation.

– Result: Colombian government when instituting and expanding social programs in the early nineties, inadvertently created incentives for people to move from the formal to the informal labor market.

• Yánez-Pagans (2008): Exploits the sharp discontinuity in Bolivida assignment mechanism to assess its effect on educational expenditure.

– Results: Show differences in intra-household income allocation process towards children's educational expenditure by gender and ethnicity.

• Gasparini et al. (2007): Using data from Jefes de Hogar (PJH) and some matching estrategies.

– Results: The program induced an increase in informality.

• Among others and further inputs from Mexico (health) and Argentina (non-contributive pensions) by Pages et alia (forthcoming)

Plug-ins

• Conditional Cash Transfers (CCTs - César Bouillon)

• Social cohesion and trust (IADB, 2008)

Next steps, time frame, wishes, requests and hopes…

• Layer 1. Crafting the dataset: 5 months (outsourced)

• Layer 2. Literature review: goes in parallel

• Writing the chapter: 2 months

This chapter can be ready by April, 2009 (but we will need support for the outsourced activity).