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