Lecture11A-European Social Model2

• ESM = welfare state

– Large state; – High and progressive taxes; – Wide range of social protection measures addressed to all citizens; – Wide range of social services;

• Set of policy goals and instruments, based on principles of solidarity, aimed at ensuring social justice, equal opportunities and protection against economic, social and environmental risks; • Components of ESM:

What is ESM?

25

30

35

40

45

50

55

1960

28.1

28.4

1970

35.1 32.5

1980

33.7

45.8

1990

34.8

49.3

2005

USA

36.5

UE-15

48.3

Public expenditures in EU-15 and USA (% of GDP)

1. Labour market policies and regulations (e.g. EPL) 2. Social security measures (pensions, stipends, etc)

3. Redistribution of incomes through taxes and transfers 5. Policies of provision of public services (free or at low cost)

2. Provision of income to persons unable to work (elderly, youth, disabled)

3. Elimination of poverty and reduction of income inequalities

4. Access to necessary public services

INSTRUMENTS

1. Protection against labour market risk

GOALS

Goals and instruments of ESM

• High GDP growth rate (>4%); • Macroeconomic balance: low unemployment, low inflation, low public debt; • In 1950-1975 EU GDP/capita increased from 35% of the US level to more than 70%; • Progress in other „welfare” areas: education, health care, life expectancy, gender balance, poverty reduction;

Success of ESM in 1945-1975

• Economic growth rate slows down; • Poor performance in employment promotion: increase in unemployment and fall in labor market participation; • Poor performance in other areas (inequality reduction, quality of life improvement); • High and growing cost: deterioration of public finances and growth of public debt;

Symptoms of crisis after 1975

0

1

2

3

4

5

6

7

8

9

10

1970-1980

3,2

3,88

Unemployment rate, %

GDP growth rate, %

1980-1990

2,4

8,32

1990-2000

2,1

9,19

Symptoms of crisis: lower growth and higher unemployment in Western Europe

40 35 30

55 50 45

75 70 65 60

80

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

GDP//capita in EU-15, 1950-2000 ((in PPS, constant prices 1995, USA = 100)

1

2

3

4

5

6

7

8

9

10

1960

1965

1970

1975

1980

1985

EU

US

1990

1995

2000

Performance of the European labour markets

Unemployment rate (%)

66,3 45

59,4 7

Employment rates, total

Employment rates for older people (>55)

Employmnet rates for women

Unemployment rates, total

4,5

65

61

70

USA

2. EU – Lower flexibility, strict EPL, trade unions, higher taxes, lower earnings disparity, UB => higher labour cost in EU compared to US

1. USA – High flexibility, Low EPL, intensive margin of labour supply, earnings and taxes;

What is the reason? Two different models of labour markets :

EU25

Index / 2008

Labour markets in EU – Lisbon Strategy

2

3

4

5

6

7

8

9

10

11

12

SLK

LAT

BEL

G ER

LUX

FRA

LIT

PO L

ESP

BEL

FRA

EU25

EU25

ITA

CZE

FIN

POR

MAL

SLO

IRL

LAT

LIT

EST

G BR

GER

EST

CYP

LUX

FIN

SLO

GBR

AUT

AUT

CZE

SEW

CYP

NED

DEN

DEN

NED

50

GRE

PO R

60

POL

G RE

70

ITA

HUN

70% - Strategia LizboĔska

HUN

SLK

Stopa zatrudnienia

MAL

ESP

80

IRL

SWE

•

•

•

•

•

•

• • •

•

Graph 2. Unemployment rates, EU25, USA, 2008. High unemployment in most of the countries. NED, DEN, CYP, AUT, CZE, SLO < 5% BEL, POL, FRA, GER, LAT, POR, GRE, HUN > 7% SLK, ESP > 9%

Graph 1. Employment rates EU25 and USA, 2008. Disparity in outcomes EU25 9 countries met the target (LS) DEN, NED, SWE, AUT, GBR, FIN, CYP, GER, EST>70% Low efficiency: MAL, HUN, ITA, POL.

Performance of the labour markets

USA

USA

25

30

35

40

45

50

55

60

65

70 Strategia LizboĔska

Stopa zatrudnienia

BEL

SLK

75

LUX

FRA

CZE

AUT

EU25

GRE

IRL

ES P

FRA

EU25

POR

POR

CYP

NED

SLO

LIT

LAT

IRL

GER

GER

GBR

CYP

AUT

FIN

FIN

G BR

EST

DEN

NED

LAT

SWE

ES T

DEN

SW E

30 ESP

BE L

40

SLK

ITA

50

POL

LUX

60

HUN

SLO

60% - Strategia LizboĔska

GRE

PO L

70

LIT

CZE

Stopa zatrudnienia

ITA

HUN

80

MAL

MA L

Graph 4. Employment aged 55-64 years, 2008. Best performance: SWE, EST > 60 % LAT, GBR, DEN, FIN, CYP, GER, IRL, LIT, NED, POR > 50% Inefficient: MAL, HUN, POL, SLO, LUX, ITA, BEL < 35%

•

•

•

•

•

•

•

Graph 3. Employment rates for women, 2008. Best performance: DEN, SWE, NED > 70% FIN, EST, AUT, GBR, GER, LAT, SLO, CYP, POR, LIT, FRA, IRL > 60% Inefficient : MAL, ITA, GRE < 50%

•

Performance of the labour markets

USA*

USA

E – employment rate; H – labour intensity (hours/year); P – productivity (output/hour);

GDP/capita = E x H x P

Basic equation of GDP/capita:

Explaining the difference in GDP levels

EU vs. USA

-

100

Productivity (US=100)

GDP/capita

1800

-

94-96

1520

64

(2003)

(2003)

72

EU-15

USA

Labour intensity (hours per year)

Employment rate (% of total labour force)

Component

70,3-71,8

94-96

84

89

(USA=100)

EU-15

two different economic models

EU vs. USA:

75

80

55

60

65

70

S to p a z a tr u d n ie n ia

79

81

GRE

ESP

POR

IRL

ITA

GBR

85

BEL

87

LUX

FRA

Praw dopodobieĔstw o unikniĊcia ubóstw a

83

UE15

GER

89

FIN AUT

DEN NED

91

SWE

•

•

•

•

Mediterranean : GRE, ITA, ESP, POR

Continental : AUT, BEL, FRA, LUX, GER

Anglo-Saxon : GBR, IRL

Scandinavian : DEN, FIN, SWE, NED

• Four models:

European Social Model: T. Boeri (2002) & A. Sapir (2005)

Employment rate, total

+ + +

Country/ Index

Scandinavian

Anglo-Saxon

Continental

Mediterranean

EU25

USA

+

-

-

+

+

+

Employment rate, women

+

-

-

-

+

+

Employment rate, age 55-64

European labour markets performance-summary

• • • • •

Minimum wage; Labour taxation; Regulations concerning working time; Employment protection legislation; Trade unions.

Labour markets institutions

2. Reasons for using this instrument: • protect workers; • ensure that working families and their income provides an adequate standard of living; • reduce the wage disparities between workers.

1. Definition: • The minimum wage is understood as the lowest level of remuneration set in the national legislations (for a ceratain unit of time).

Minimum wage

2009

2008

2007

ROM LIT SLK

POL

HUN CZE

POR

SLO

MAL

GRE

ESP

USA

FRA

BEL

NED

GBR

IRL

LUX

Nominal minimum wage (EUR). 13-times difference: 1640 EUR (LUX) and 120 EUR (BUL)

0

200

400

600

800

1000

1200

1400

1600

EST

1800

LAT

Minimum wage in the EU countries & US

BUL

2009

2008

2007

BUL LAT LT

EST SLK

POL

CZE

POR

SLO

ESP

GRE

USA

MAL

IRL

FRA

BEL

GBR

NED

LUX

Minimum wage (PPP) Disparity decreases from 1:13 to 1:6; the order of the countries does not change a lot.

0

200

400

600

800

1000

1200

1400

HUN

1600

Minimum wage in the EU countries & US

ROM

3. Countries, where is over 46% - IRL, BEL, FRA, LUX, NED, MAL

2. Countries, where is between 40-46% - SLO, POR, HUN

1. Countries, where is below 38% - CZE, EST, LAT, LIT, SLK, GBR, POL, ESP;

Kaitz index in 2009 (relation of minimum to average wage):

Minimum wage in the EU countries

2.

1.

Reducing the level of minimum wage, use the more efficient instruments such as employment subsidies: in-work benefits and tax credits The efficiency of these instruments is confirmed in numerous studies: OECD, 1997; Whitehouse, 1996; Schulz, 1996; Gregg Johnson, 1999; Blundell, Duncan, McCrea, Menhir, 1998, Paull, Walker and Zhu, 1999; EISS and Liebman, 1996 ; Meyer 2001; Meyer and Rosenbaum, 2001; EISS and Liebman, 1996; EISS and Hoynes, 1998; Meyer 2002, Hoffman and Seidman, in 2003, Ziliak, 2004; Greenstein 2005.

Recommendations:

1. Minimum wage leads to distortion of the labor market. 2. Negative impact on employment of younger workers with lower skills

Minimum wage- conclusions

• • •

0

10

20

30

40

50

60

70

80

90

A R F

E N W U S H

N E D

IN F

X LU R O P A IT R O N

E R G R E G E IR

R L S S U A E Z C T E N A S U

K U

E IC

L O P

S E O

N A C

I U S

P JA

X E M

R O K

L Z N

A R P U S T

The EU member states are diversified in terms of tax burden. Level of taxation is higher than in Non-european OECD countries The construction of tax systems and high minimum wages are among the factors responsible for persistently high levels of unemployment amongst the EU member states

L E B

„Tax wedge” in OECD countries (income tax plus social security contribution, as % of gross salaries augmented by contribution paid by employer, 2000)

1493

1510

1738

1896

1542

1609

1443

1365

1818

1766

1810

AUT

BEL

CAN

CZE

DEN*

FIN

FRA

GER

GRE

HUN

USA

2002

1 798

1 780

1 783

1 353

1 457

1 594

1 541

1 914

1 733

1 461

1 474

2007

t

-1%

1%

-2%

-1%

1%

-1%

0%

1%

0%

-3%

-1%

ෙ

Country

GBR

ESP

SLK

POR

POL

NED*

LUX

KOR

JAP

IRL

Country

1674

1682

1950

1686

1958

1317

1582

2410

1837

1667

2002

Labour intensity

1 655

1 621

1 947

1 675

1 953

1336

1 541

2 266

1 850

1 543

2007

-1%

-4%

0%

-1%

0%

1%

-3%

-6%

1%

-7%

t

ෙ

POL

SLK

LAT

CZE

GRE

ITA

POR

AUT

MAL

ESP

EST

US -1800 NED-1220

Female

Male

GER BEL GBR

FIN

EU-1550 POL,GRE-1800

IRL LUX FRA

LIT

CYP

HUN

SLO

47

total

DEN

43

39

35

31

27

23

• Intesivity • Diversity:

SWE

Hours of work, 2005 (per week)

NED

• • • •

working time schedules imposed by legislation or collective agreements, different holidays and days off, the structure of employment and the share of full-time and part-time workers in total employment.

• Diversity among the EU countries in terms of hours of work due to:

Labour intensity

0,0

0,5

1,0

1,5

2,0

2,5

regular contracts

DEN

HUN

CHE

3,0

temporary

J PN

3,5

collective dismissal

CZ E

4,0

PO R

ME X

ES P G RE F RA

NO R SW E

G ER BE L ITA

NLD AUT

PO L

FIN KO R SV K

AUS

NZ L

IRL

CAN

G BR

USA

• Raising a sense of stability, job security, protect workers from abuse by their employer (Pissarides, 2001; Bertola, 2004); • Protect employees against dismissal (Young, 2003); • Benefit from establishing long-term relationship with the worker's employer (an increase of skills, a sense of loyalty (Ichniovski, 1997, Nickell and Layard, 1998).

EPL (employment protection legislation)

T UR

Years at work

7

8

9

10

11

12

13

14

ESP

ITA

FIN

BEL

IRL

DEN

11

NED

10,7

POR

A UT

11,3

9,7

9,5

8,7

8,6

8,4

Med. A ngSax

11,7

11,7

10,7

10,5

10,3

9,3

Cont. Scan

GBR IRL DEN HUN ESP CZE NOR AUT FIN GER SWE NLD POL ITA FRA BEL SVK POR GRE

FRA

9,4

GBR

12

GRE

12,5

20 18 16 14 12 10 8 6 4 2 0

12,5

Flexibilty vs. Security

12,8

0

0 ,5

1

1 ,5

2

2 ,5

3

3 ,5

4

4 ,5

5

D EN

N ED

SW E

B EL

G ER

F IN

• ALMP increases security and allows flexibility

% GDP, year 2004

FRA

ES P

30

35

40

45

50

55

0

PO R

0,2

USA

IR L

0,4

CZE HUN

A UT

0,6

AUT IRL

GBR

ITA

ALMP-flexicurity

Security

IT A

1

FIN

FRA

GBR

ALMP% GDP

A LMP

PL M P

0,8

POR

ESP

LUX

1,2

BEL

GER

1,4

NED

HUN

SWE

CZ E

1,6

US A

1,8

DEN

R2 = 0,2666

2

• Strong unions: Scandinavian, Continental, Mediterranean • Weaker unions: AngloSaxon

• Collective agreements are an important instrument, which influences wages and the terms of employment.

80 63 39 42

SWE HUN GBR OECD

58

NOR

15

35

NED

USA

11

ESP

57

18

FRA

SLK

79

DEN

33

35

CZE

POL

47

AUT

Union density 1990 a)

Trade unions

34

31

20

79

13

36

15

59

25

15

10

75

33

37

2000

66

>40

>45

>80

18

-

>70

>70

>70

>70

>90

>70

>55

>95

60

>30

>30

>90

14

>50

>40

>70

>80

>80

>90

>80

>25

>95

Collectiva barganing coverage 1990 b) 2000

• Demographic changes • Globalization • Technological revolution

New challenges

• „Greying” of Europe due to longer life expectancy and lower fertility rates; • Share of old people (+65) in total population increased from 3% w 1900, to 10% in 1960, and to 18% in 2004; • Dependency ratio for +60 increased from 26% in 1960 do 35% in 2000;

Demographics

-40

-20

0

20

40

60

80

100

-17

0-14 -23

15-29

50-64

22

>65

49

>80

81

Expected changes in population in selected age groups in EU-25 between 2000 and 2030, in %

• Increase of expenditures on social security; • Shortage of labour (especially of less skilled and in services); • Increase of labour costs due to higher wages and higher social security contributions; • Possible further decline of competitiveness of European enterprises; • Possible slower growth;

Implications of demographic changes for European economies

– protection and isolation; – lower labour costs and social standards; – restructuring towards high-tech, human-capitalintensive, innovative sectors;

• Removal of barriers in trade and investment; • Increased competiton from developing countries, especially in labour-intensive, low-tech sectors producing standard goods; • Transfer of production activities to low cost countries; • Possible responses:

Implications of globalization

– Protection and isolation; – Gradual loss of markets and incomes; – Adjustments through innovation: acquiring new skills, increased mobility, flexibility and life-long learning.

• Rapid development of new technologies: IT, telecom, biotech; • Accelerated emergence of new products and new production processes; • Accelerated decline of traditional sectors, products, skills and professions; • Increased competition; • Possible responses:

Implications of technological revolution

– Labour market policies; – Social security systems; – Tax policy; – Eradication of poverty and exclusion; – Provision of public goods and services;

• Preserve main goals and values of ESM; • Acknowledge the new reality; • Adjust policies to the new challenges:

What is to be done?

• ESM is not working; • New challenges will not disappear; • If goals and values of ESM are to be preserved, policies must change; • Isolation and defence of status quo are not the options; • Creative adjustment is the key: new policies should allow adjustments through flexibility, adaptability, acquisition of new skills, initiative and selfreliance; • Failure to reform will condemn Europe to stagnation and gradual civilization decline.

Conclusions

Thank you