The Euro and Structural Reforms

Transcription

1 The Euro and Structural Reforms Alberto Alesina (Harvard University) Silvia Ardagna (Harvard University) Vincenzo Galasso (Bocconi University) Structural Reforms without Prejudice Università Bocconi, Milan CEPR, Fondazione Rodolfo Debenedetti, International Monetary Fund

2 Why should the EURO matter? Pro Reform Views Relinquishing monetary policy (no more competitive devaluations) requires liberalization of labor and product market (Bean, 1998; Duval & Elmeskov, 2005) Single currency increases price transparency, trade and competition. (Rose, 2000; Micco, Ordonez & Stein, 2003; Frankel, 2008) Product Market: Effects on tradable sector put pressure for upstream deregulation. (Nicoletti, 2005) Political tool to promote product market reform agenda

3 Why should the EURO matter? Against Reform Views External constraints (SGP) makes it more difficult to implement reforms with up-front costs e.g., unemployment (Saint Paul & Bentolila, 2000) No devaluations to reduce real wages (Obstfeld, 1997) Labor Market: More competition increases the demand of protection by the insiders

4 The Euro and Structural Reforms Our Task: Evaluate the effect of the EURO on Structural Reforms Our Prior: little if any Our Posterior: major update!!

5 Structural Reforms Product Market: OECD Regulatory (anticompetition) indicators for 7 non-manufacturing industries (electricity, gas, telecom, post, airlines, road freight, railways) measuring Barrier to Entry & Vertical Integration, Market Structure, Price controls, Public ownership aggregated in 3 sectors: Energy, Communication & Transportation 21 OECD countries in

6 Structural Reforms Labor Market: two indicators OECD Employment Protective Legislature, measuring (i) severance pay and notice period, (ii) procedural inconvenience, (iii) difficulty of dismissal. Temporary and Regular workers Unemployment Benefit Replacement Rate for low-income workers (2/3 avg income) in 1st year 21 OECD countries in

7 Other Determinants of Structural Reforms Macro-economic variables: crisis (TINA argument), fiscal deficit or surplus, unemployment External factors: European Single Market Political elements: government strength & political orientation, political cycles Reforms in trading partners or in other sectors (financial, trade) Sequencing of Labor and Product Market Reforms (Blanchard & Giavazzi, 2003)

8 Reforms of the Product Market: Descriptive Evidence All sectors have deregulated, particularly after 1992, communication more than others

9 Reforms of the Product Market: Descriptive Evidence 0 Total Regulation Energy Communication Transport -0,05-0,1-0,15-0,2-0,

10 Reforms of the Product Market: Descriptive Evidence All sectors have deregulated, particularly after 1992, communication more than others Anglo Saxon countries less regulated than other OECD countries in the mid-seventies and started deregulation earlier

11 Reforms of the Product Market: Descriptive Evidence 0 NO EU ESM EURO -0,05-0,1-0,15-0,2-0,25 Australia, Canada, Japan, New Zealand, Norway, Switzerland, US Denmark, Sweden, UK Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain

12 Reforms of the Product Market: Descriptive Evidence All sectors have deregulated, particularly after 1992, communication more than others Anglo Saxon countries less regulated than other OECD countries in the mid-seventies and started deregulation earlier Deregulation occurred in all countries. Over time there has been convergence in the level of regulation laggards are catching on

13 Reforms of the Product Market: Descriptive Evidence 0 FIN 2 2,5 3 3,5 4 4,5 5 5,5 6-0,02-0,04 US CAN NZL Deregulation in ,06-0,08-0,1-0,12-0,14 AUSUK BEL SWE CHE AUT NOR JPN IRL SPA GER GRC FRA NDL POR -0,16 ITA -0,18 DNK -0,2 Average regulation

14 Reforms of the Labor Market: Descriptive Evidence INDEX OF STRICTNESS OF EPL FOR REGULAR WORKERS Prt Aus Can GBR Dnk Sw i Bel Irl Ita Fra Jpn Nor Sw e Deu Aut Gcr Fin Nld Esp USA

15 Econometric Analysis Dependent variable: Regulation Index (sector-country-year) in Product Market; EPL or Unemployment Benefit (country-year) in Labor Market Explanatory Variables: Lagged dependent variable, sectorcountry-year fixed effects, SINGLEMKT, EMU, other controls SINGLEMKT = 1 if EU country and year 1993, 0 otherwise EMU = 1 if EMU country and year 1999, 0 otherwise GLS estimation allowing for heteroshedasticity IV for EURO (gravity equation model) EMU interactions: Sector Specific, Lagged dependent variable

16 Product Market ESM & EURO (1) (2) (3) REGNOPO REGNOPO REGNOPO REGNOPO(-1) (109.60)*** (107.19)*** (104.66)*** SINGLE MKT (2.28)** EMU (5.28)*** SINGLE MKT_ENERGY (0.61) (0.23) SINGLE MKT_COMMUNICATIONS (0.81) (0.81) SINGLE MKT_TRANSPORT (4.35)*** (4.05)*** EMU_ENERGY (9.07)*** (0.49) EMU_COMMUNICATIONS (5.74)*** (0.31) EMU_TRANSPORT (2.39)** (6.26)*** EMU*REG(-1) (6.24)*** Observations

17 Product Market 5 sectors REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) (112.17)*** (108.13)*** SINGLE MKT (2.05)** EMU (4.83)*** SINGLE MKT_RETAIL (2.07)** SINGLE MKT_PROFESSIONAL (2.74)*** EMU_RETAIL (4.16)*** EMU_PROFESSIONAL (1.14) EMU*REG(-1) Observations

18 Product Market Endogenous EURO 1 Stage 2 Stage emu emu emu emu population1sh (4.95)*** (5.35)*** (5.49)*** (6.14)*** prmse (1.82)* (2.20)** (0.43) (0.72) yrmse (4.45)*** (4.41)*** (4.44)*** (5.03)*** border (2.75)*** (3.31)*** (1.24) (1.46) comlang (4.54)*** (4.95)*** (3.78)*** (3.96)*** colony (1.60) (1.75)* (2.06)** (2.85)*** laginfldeveu (0.93) (0.62) laglnrtrade (6.02)*** (7.62)*** laglntrade (5.63)*** (6.91)*** laginflwdi (4.06)*** (5.11)*** Observations REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) EMU (2.25)** (1.97)** (1.88)* (1.66)* Observations R-squared

19 Empirical Evidence ESM and EURO induce Deregulation in the Product Market, even when EURO is instrumented using gravity equation ESM had an impact on Deregulation in Transport EURO had an impact on Deregulation in Energy & Communication Effect of EURO was stronger in highly regulated countries, not true for the ESM Magnitudes: EURO in Switzerland in 2003 Energy (0.8 UK 4.4): 4.4 (1 st ) to 3.9 (3 rd, France) Communication (1.5 NZ 2.6 N): 2.5 (2 nd ) to 2.2 (13 th, Spain)

20 Product Market why Euro matters 3 SECTORS (1) (2) (3) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) (101.60)*** (92.94)*** (104.17)*** SINGLE MKT_ENERGY (0.12) (0.08) (0.23) SINGLE MKT_COMMUNICATIONS (0.84) (0.65) (0.83) SINGLE MKT_TRANSPORT (4.37)*** (3.89)*** (4.05)*** EMU_ENERGY (2.38)** (1.92)* (0.30) EMU_COMMUNICATIONS (1.95)* (1.56) (0.28) EMU_TRANSPORT (7.37)*** (6.66)*** (6.06)*** EMU*REG(-1) (7.94)*** (7.08)*** (5.51)*** COMPET1(-1) (0.96) (0.38) COMPET1^2(-1) (0.55) (0.11) EMU*COMPET1(-1) (2.81)*** (2.77)*** N. OF DEVALUATIONS FROM (3.46)*** EMU* N. OF DEVALUATIONS FROM (1.83)* Observations (Loss of) Competiveness at country level as growth rate relative to competitors of (i) cpi or (ii) export goods deflators

21 Product Market Other determinants (4) (5) (6) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) (55.21)*** (49.64)*** (48.67)*** EMU*REG(-1) (4.64)*** (3.99)*** (3.57)*** EMU*COMPET1(-1) (2.01)** (2.02)** (1.80)* VA(-1) (1.98)** (0.77) (1.12) LABOR EXPENSES(-1) (2.20)** TOT. EMPLOYMENT(-1) (2.41)** CRISIS(-1) (2.65)*** (2.48)** (2.78)*** PRIMARY SURPLUS/GDP (-1) (1.70)* (1.41) (1.12) RIGHT GOV.(-1) (0.52) (0.83) (0.75) CENTER GOV.(-1) (1.86)* (2.08)** (1.97)** ELECTION YEAR(-1) (0.98) (1.10) (1.02) REGREFNOPO TRADING PARTNERS(-1) (1.94)* (2.08)** (2.08)** UNEMPLOYMENT BENEFIT (-1) (2.19)** (1.78)* (2.35)** EMPLOYMENT PROTECTION (-1) (1.01) (1.67)* (0.41) Observations

22 Empirical Evidence: why Euro matters No direct effect of loss of Competition on Deregulation in the Product Market Loss of competition measured at country level as growth rate relative to competitors of (i) cpi or (ii) export goods deflators Loss of Competition & History of Competitive Devaluations induce Deregulation in EURO countries, but effect of EURO remains Among the other determinants: sector employment, TINA argument, follow your trading partners Sequencing of reforms: more generous Unemployment benefits help to Deregulate, but no effect of EPL

23 Labor Market EPL (1) (2) (3) (5) EMPLOYMENT PROTECTION EMPLOYMENT PROTECTION EMPLOYMENT PROTECTION EMPLOYMENT PROTECTION EMPLOYMENT PROTECTION (-1) (31.35)*** (31.08)*** (31.51)*** (30.77)*** SINGLE MKT (0.97) (0.95) (1.07) (0.24) EMU (0.66) (0.79) (0.04) (0.23) EMU*EPL(-1) (1.13) COMPET1(-1) (0.06) COMPET1^2(-1) (0.34) EMU*COMPET1(-1) (0.94) CRISIS(-1) (0.46) UNEMPLOYMENT BENEFIT( (1.58) EPL TRADING PARTNERS(-1) (1.46) PMKT REGULATION(-1) (0.47) Observations

24 Labor Market Unemployment Benefit (1) (2) (4) (5) UNEMPLOYMENT BENEFIT UNEMPLOYMENT BENEFIT UNEMPLOYMENT BENEFIT UNEMPLOYMENT BENEFIT UNEMPLOYMENT BENEFIT(-1) (38.57)*** (38.58)*** (36.90)*** (36.02)*** SINGLE MKT (1.43) (1.42) (0.77) (0.62) EMU (2.03)** (1.35) (2.00)** (2.35)** EMU*UBRR(-1) (0.45) CRISIS(-1) (0.23) (0.23) PRIMARY SURPLUS/GDP (-1) (1.18) (0.76) RIGHT GOV.(-1) (0.12) (0.48) CENTER GOV.(-1) (0.99) (0.91) ELECTION YEAR(-1) (0.16) (0.05) EMPLOYMENT PROTECTION (-1) (0.46) UB TRADING PARTNERS(-1) (2.29)** PMKT REGULATION(-1) (1.38) Observations

25 Labor Market Early Retirement (1) (2) (3) VARIABLES IMPTAX5559 IMPTAX5559 IMPTAX5559 IMPTAX6064 IMPTAX6064 IMPTAX6064 LAG DEPENEDENT *** *** *** *** *** *** (0.03) (0.03) (0.03) (0.02) (0.02) (0.03) SINGLEMKT (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) EMU ** ** ** ** (0.00) (0.01) (0.00) (0.00) (0.02) (0.02) CRISISUNRLAG *** (0.00) (0.01) DEPRATIOLAG (0.00) (0.00) REGREFNOPOLAG (0.00) (0.00) EPLRLAG (0.00) (0.01) UBRRLAG (0.03) (0.04) DEPENDENT*EMU *** ** (0.02) (0.02) (0.03) CONSTANT (0.00) (0.00) (0.02) (0.01) (0.01) (0.02) OBSERVATIONS

26 Labor Market Outcomes (1) (2) NOMINAL WAGE GROWTH NOMINAL WAGE GROWTH NOMINAL WAGE GROWTH LAGGED (10.43)*** (10.12)*** LAGGED INFLATION (3.69)*** (3.91)*** ESM (-2.50)** (1.35) EMU (-2.90)*** EMU (0.89) (-1.50) EU-NO EMU (-1.33) Observations

27 Conclusions: Euro matters Strong evidence of effect of EURO on deregulation in the Product Market in particular in Energy & Communication Labor market: no impact on EPL; positive effect on Unemployment Benefit; reduction of incentives to retire early Sequencing of reforms: more UB facilitates product market deregulation

28 Conclusions: but why? EURO increases competition on tradables and puts pressure upstream. Barone and Cingano (2008): less regulation in Energy (& Professionals) more growth in downstream manufacturing sectors. EURO ended the Competitive Devaluation season. Bugamelli, Schivardi & Zizza (2008): after the EURO more restructuring in manufacturing sector benefitting from devaluations. EURO may increase price transparency and competition even in non-tradable. More capital flows and contemporaneous changes in technology make markets (energy & communication) more contestable (Nicoletti, 2005)

29 Labor Market Outcomes: Employment Rate (1) (2) (3) (4) (5) (6) Total Male Female Total Total Overall LAGGED DEPENDENT (17.45)*** (19.31)*** (24.23)*** (22.90)*** (30.49)*** (21.58)*** ESM (4.47)*** (1.83)* (2.03)** (2.02)** (2.25)** (2.64)*** EMU (4.40)*** (3.17)*** (2.61)*** (2.65)*** (4.24)*** (3.27)*** Observations (1) (2) (3) (4) (5) (6) Total Temp Male Temp Female Temp Total Perm Male Perm Female Perm LAGGED DEPENDENT (21.18)*** (21.88)*** (18.75)*** (27.05)*** (22.74)*** (29.95)*** ESM (0.41) (0.43) (0.12) (3.42)*** (3.15)*** (2.77)*** EMU (0.21) (0.59) (1.45) (2.67)*** (3.11)*** (2.79)*** Observations

30 Conclusions: Euro matters Labor market: impact on its functioning. Higher employment among women and young; more permanent than temporary, more part-time than full-time