What Lessons Should Taiwan Learn from European Welfare States?

Transcription

1 What Lessons Should Taiwan Learn from European Welfare States? James Heckman University of Chicago and American Bar Foundation Institute of Economics, Academia Sinica, Taipei July 11, / 109

2 Calls have been made to introduce features of the Western European welfare state into Taiwan. 2 / 109

3 Calls have been made to introduce features of the Western European welfare state into Taiwan. The case against introducing the welfare state has been that it blunts incentives and reduces productivity. 2 / 109

4 The generally poor economic performance of the Western European welfare state would seem to support this argument. 3 / 109

5 The generally poor economic performance of the Western European welfare state would seem to support this argument. But recently, it appears that certain welfare states have done well, especially the Nordic welfare states. 3 / 109

6 The generally poor economic performance of the Western European welfare state would seem to support this argument. But recently, it appears that certain welfare states have done well, especially the Nordic welfare states. It is useful to inform the Taiwanese debate by examining the recent case for the welfare state based on Nordic systems, which have been extolled by many economists. 3 / 109

7 What is the evidence on their performance? 4 / 109

8 What is the evidence on their performance? In an age of globalized markets and rapid technological change, the Western welfare state is under pressure. 4 / 109

9 What is the evidence on their performance? In an age of globalized markets and rapid technological change, the Western welfare state is under pressure. The economic performance of many welfare states has been poor. 4 / 109

10 Unemployment is high there has been a rapid run up in the past 20 years. When properly measured, many Western welfare states have much higher rates of unemployment than are reported in official statistics. 5 / 109

11 Unemployment is high there has been a rapid run up in the past 20 years. When properly measured, many Western welfare states have much higher rates of unemployment than are reported in official statistics. Incentives to withdraw from work, to go underground, to evade taxes, to retire early and not to produce are high. 5 / 109

12 Unemployment is high there has been a rapid run up in the past 20 years. When properly measured, many Western welfare states have much higher rates of unemployment than are reported in official statistics. Incentives to withdraw from work, to go underground, to evade taxes, to retire early and not to produce are high. Immigration levels are high in many European countries. 5 / 109

13 Unemployment is high there has been a rapid run up in the past 20 years. When properly measured, many Western welfare states have much higher rates of unemployment than are reported in official statistics. Incentives to withdraw from work, to go underground, to evade taxes, to retire early and not to produce are high. Immigration levels are high in many European countries. There are serious problems with immigrant assimilation in part created by welfare state policies. 5 / 109

14 There is slow growth in the formation of human capital, a vital ingredient for a modern economy. 6 / 109

15 There is slow growth in the formation of human capital, a vital ingredient for a modern economy. There are slow rates of business formation and weak incentives for entrepreneurship. 6 / 109

16 There is slow growth in the formation of human capital, a vital ingredient for a modern economy. There are slow rates of business formation and weak incentives for entrepreneurship. Low levels of research and development. 6 / 109

17 There is slow growth in the formation of human capital, a vital ingredient for a modern economy. There are slow rates of business formation and weak incentives for entrepreneurship. Low levels of research and development. High taxes on labor and, in some countries, on capital. 6 / 109

18 There is slow growth in the formation of human capital, a vital ingredient for a modern economy. There are slow rates of business formation and weak incentives for entrepreneurship. Low levels of research and development. High taxes on labor and, in some countries, on capital. Poverty traps are built into the tax rates that discourage work. 6 / 109

19 The forces creating the pressure on the welfare state: growing competitiveness and an inability to tax internationally mobile factors of production; an increase in the unpredictability in trade and technology and the bias against unskilled labor in trade and technology are also the forces that create the demand for the welfare state as an insurer against risk, and as a protector against the reduced wages that the unskilled experience when the demand for their skills is reduced. 7 / 109

20 As economies become more open, it is much more difficult to shelter workers and firms from the rigors of the market. 8 / 109

21 As economies become more open, it is much more difficult to shelter workers and firms from the rigors of the market. And in fact, less sheltered economies like the U.S. and U.K. have shown substantial increases in wage inequality and social inequality due to these trends. 8 / 109

22 A skill premium has emerged for flexibility and responsiveness. 9 / 109

23 A skill premium has emerged for flexibility and responsiveness. High levels of workforce skill and a regulatory environment that supports change allow economies to benefit from new opportunities. 9 / 109

24 A skill premium has emerged for flexibility and responsiveness. High levels of workforce skill and a regulatory environment that supports change allow economies to benefit from new opportunities. An economic order in Europe that was well adapted to the more stable and predictable environment of the 1950 s and 1960 s and that had a large role for unskilled labor to play has become dysfunctional in the early 21 st century. 9 / 109

25 The opportunity cost of security and preservation of the status quo whether it is the status quo technology, the status quo trading partner or the status quo job has risen greatly in recent times. 10 / 109

26 The opportunity cost of security and preservation of the status quo whether it is the status quo technology, the status quo trading partner or the status quo job has risen greatly in recent times. While reforms have been made in Europe, they have largely been small-scale in nature. 10 / 109

27 The opportunity cost of security and preservation of the status quo whether it is the status quo technology, the status quo trading partner or the status quo job has risen greatly in recent times. While reforms have been made in Europe, they have largely been small-scale in nature. Europe has to run and not walk to keep up with the pace of global change, and it is barely even walking, although by European standards, it is rapidly reforming. 10 / 109

28 The opportunity cost of security and preservation of the status quo whether it is the status quo technology, the status quo trading partner or the status quo job has risen greatly in recent times. While reforms have been made in Europe, they have largely been small-scale in nature. Europe has to run and not walk to keep up with the pace of global change, and it is barely even walking, although by European standards, it is rapidly reforming. Of course not all welfare states have lagged, or at least they have not all lagged in the same way, and I want to examine these differences, and their relevance for Taiwan. 10 / 109

29 The key to a successful welfare state is in devising proper incentives to encourage actors at all levels of the economic system to respond to the new opportunities. 11 / 109

30 The key to a successful welfare state is in devising proper incentives to encourage actors at all levels of the economic system to respond to the new opportunities. This includes workers, school teachers, waiters, government officials, factory owners and union leaders. 11 / 109

31 The key to a successful welfare state is in devising proper incentives to encourage actors at all levels of the economic system to respond to the new opportunities. This includes workers, school teachers, waiters, government officials, factory owners and union leaders. In principle, a welfare state can provide the proper incentives for productivity and at the same time afford a measure of security and dignity for its citizens. 11 / 109

32 The key to a successful welfare state is in devising proper incentives to encourage actors at all levels of the economic system to respond to the new opportunities. This includes workers, school teachers, waiters, government officials, factory owners and union leaders. In principle, a welfare state can provide the proper incentives for productivity and at the same time afford a measure of security and dignity for its citizens. But it has to respect the operation of incentives, perverse or positive. 11 / 109

33 In my lecture today, I develop five broad themes. 12 / 109

34 In my lecture today, I develop five broad themes. First and foremost, it is important to remember that people respond to incentives, and their responses are often very strong. It is very dangerous to underestimate the ingenuity of economic agents in pursuing their self interest. It is important to review the evidence on these incentive effects because they are often ignored or misrepresented in popular policy discussions. 12 / 109

35 In my lecture today, I develop five broad themes. First and foremost, it is important to remember that people respond to incentives, and their responses are often very strong. It is very dangerous to underestimate the ingenuity of economic agents in pursuing their self interest. It is important to review the evidence on these incentive effects because they are often ignored or misrepresented in popular policy discussions. Second, the debate about the welfare state often presented in discussions by policy analysts poses a false dichotomy. It compares the U.S. (or the Anglo-Saxon bloc of countries) to Europe. It frames the debate as a choice among systems in place. 12 / 109

36 The U.S., Canada, the U.K., Ireland, Australia, and New Zealand are, of course, welfare states, and they have made their share of mistakes in devising incentives and protecting their workers. 13 / 109

37 The U.S., Canada, the U.K., Ireland, Australia, and New Zealand are, of course, welfare states, and they have made their share of mistakes in devising incentives and protecting their workers. The relevant issue is not whether Europe should adopt the Anglo-Saxon model, or whether the Anglo-Saxons should adopt the European model. 13 / 109

38 The U.S., Canada, the U.K., Ireland, Australia, and New Zealand are, of course, welfare states, and they have made their share of mistakes in devising incentives and protecting their workers. The relevant issue is not whether Europe should adopt the Anglo-Saxon model, or whether the Anglo-Saxons should adopt the European model. Rather, it is about which features of the modern welfare state across many countries are most productive, and reduce inequality and provide insurance against uncertainty in an efficient way. 13 / 109

39 Third, the term welfare state is far too broad at least four models are often mentioned (see, e.g., Sapir, 2005) and these categories are surely too crude. 14 / 109

40 Nordic/corporatist model (Scandinavia, Finland, Netherlands): high level of security for workers, heavy reliance on active labor market policies, low inequality, high levels of taxation of labor income, relatively low levels of taxation of capital income, very high levels of education and high levels of government activity, generous grants not means tested, high levels of wage compression, centralized unions. High levels of concentrated unions and wage setting (corporatist model). 15 / 109

41 Nordic/corporatist model (Scandinavia, Finland, Netherlands): high level of security for workers, heavy reliance on active labor market policies, low inequality, high levels of taxation of labor income, relatively low levels of taxation of capital income, very high levels of education and high levels of government activity, generous grants not means tested, high levels of wage compression, centralized unions. High levels of concentrated unions and wage setting (corporatist model). Continental model (Austria, Belgium, France, Germany and Luxembourg): Heavy reliance on insurance based nonemployment benefits and old-age pensions, strong unions not all centralized, lots of regulation, inflexibility in labor markets, compressed wage distributions A marked inability to adjust to change. 15 / 109

42 Mediterranean model (Italy, Spain, Portugal, Greece): reliance on employment protection (lifetime jobs), union covered sector has compressed wages, concentrate spending on old-age pensions and allow for high segmentation of entitlements and status. 16 / 109

43 Mediterranean model (Italy, Spain, Portugal, Greece): reliance on employment protection (lifetime jobs), union covered sector has compressed wages, concentrate spending on old-age pensions and allow for high segmentation of entitlements and status. Anglo-Saxon model (United Kingdom / Ireland): social assistance only in the last resort, low levels of job protection and minimum wages, high levels of cross section wage inequality, much social spending on old-age pensions, high levels of segmentation of entitlements and status. 16 / 109

44 For close observers of the welfare state, these four categories are themselves far too broad in many respects. 17 / 109

45 For close observers of the welfare state, these four categories are themselves far too broad in many respects. For example, Ireland is a corporatist state lumped in the Anglo-Saxon camp (e.g., centralized bargaining in trade unions). It has incentives; it also has a lot of wage coordination. 17 / 109

46 These categories are at best a rough cut. I want to range widely across many countries and policy reforms inside and outside of Europe to extract the crucial features that make for economic and social success. 18 / 109

47 Comparing alternative economic systems is a dangerous practice. 19 / 109

48 Comparing alternative economic systems is a dangerous practice. Different baseline and terminal periods can produce very different ratings of the performance of any economy. 19 / 109

49 Comparing alternative economic systems is a dangerous practice. Different baseline and terminal periods can produce very different ratings of the performance of any economy. Recall the love affair with the Dutch Polder model 10 years ago that lingers on. 19 / 109

50 Comparing alternative economic systems is a dangerous practice. Different baseline and terminal periods can produce very different ratings of the performance of any economy. Recall the love affair with the Dutch Polder model 10 years ago that lingers on. Recall the earlier fascination with Japan. 19 / 109

51 Comparing alternative economic systems is a dangerous practice. Different baseline and terminal periods can produce very different ratings of the performance of any economy. Recall the love affair with the Dutch Polder model 10 years ago that lingers on. Recall the earlier fascination with Japan. The even earlier fascination with the U.S.S.R. 19 / 109

52 Fourth, failing to learn the lesson that yesterday s success is often today s failure. Many European think tanks and the OECD have embraced the Nordic model or the closely related corporatist model. 20 / 109

53 Fourth, failing to learn the lesson that yesterday s success is often today s failure. Many European think tanks and the OECD have embraced the Nordic model or the closely related corporatist model. For example, the recent 2006 OECD Jobs Report, which updated the influential 1994 OECD Jobs Report, trumpets the corporatist model as being coequal in its efficiency with the Anglo-Saxon model. 20 / 109

54 Fourth, failing to learn the lesson that yesterday s success is often today s failure. Many European think tanks and the OECD have embraced the Nordic model or the closely related corporatist model. For example, the recent 2006 OECD Jobs Report, which updated the influential 1994 OECD Jobs Report, trumpets the corporatist model as being coequal in its efficiency with the Anglo-Saxon model. An influential paper by Andre Sapir (2005) of the Bruegel Group presented at the ECOFIN conference made the same endorsement, and has had a big effect on the European discussion in the past year. 20 / 109

55 Fourth, failing to learn the lesson that yesterday s success is often today s failure. Many European think tanks and the OECD have embraced the Nordic model or the closely related corporatist model. For example, the recent 2006 OECD Jobs Report, which updated the influential 1994 OECD Jobs Report, trumpets the corporatist model as being coequal in its efficiency with the Anglo-Saxon model. An influential paper by Andre Sapir (2005) of the Bruegel Group presented at the ECOFIN conference made the same endorsement, and has had a big effect on the European discussion in the past year. Sachs, Stiglitz and the Hamilton Project endorse the Nordic states as successes. 20 / 109

56 Half a century ago, the free-market economist Friedrich von Hayek argued that a large public sector would threaten democracy itself, putting European countries on a road to serfdom. Yet the Nordic states have thrived, not suffered, from a large social welfare state, with much less public-sector corruption and far higher levels of voter participation than in the US.... Von Hayek was wrong. In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness. Jeffrey Sachs Scientific American, November 6, 2006, p / 109

57 Sweden s economic performance in the past decade has been impressive in many dimensions. 22 / 109

58 Sweden s economic performance in the past decade has been impressive in many dimensions. So has that of Finland. 22 / 109

59 Sweden s economic performance in the past decade has been impressive in many dimensions. So has that of Finland. Denmark s flexicurity system promotes job mobility and gives generous unemployment benefits and, at the same time, sanctions to promote rapid return to work among the unemployed has attracted a lot of attention among the policy pundits. 22 / 109

60 The recent fascination with Scandinavia is typical of a mentality of many policy analysts that look to a working model as a system for adoption, rather than looking at basic principles to explain the successes and failures of any model. 23 / 109

61 The recent fascination with Scandinavia is typical of a mentality of many policy analysts that look to a working model as a system for adoption, rather than looking at basic principles to explain the successes and failures of any model. I want to look at those basic principles, to draw general lessons from many models rather than to extol the virtues of one system currently in place. 23 / 109

62 Fifth, I want to make a basic methodological point that affects the way we use and interpret the evidence. A large literature on the European unemployment problem relies on arbitrarily constructed indices to examine incentive effects of different policies. 24 / 109

63 Fifth, I want to make a basic methodological point that affects the way we use and interpret the evidence. A large literature on the European unemployment problem relies on arbitrarily constructed indices to examine incentive effects of different policies. Many of these studies claim to prove that a lot of incentives ( institutions ) that basic economic theory suggest should matter do not matter. 24 / 109

64 Fifth, I want to make a basic methodological point that affects the way we use and interpret the evidence. A large literature on the European unemployment problem relies on arbitrarily constructed indices to examine incentive effects of different policies. Many of these studies claim to prove that a lot of incentives ( institutions ) that basic economic theory suggest should matter do not matter. This approach produces a statistical mirage. It is a consequence of using bad data. When incentives are properly measured, they matter, and they matter a lot. 24 / 109

65 Scholars of Latin American labor markets have measured the costs of regulation more carefully than the students of the European welfare state, and have studied economies with regime changes and policy shifts far more dramatic than what is seen in Europe, show much stronger adverse effects of perverse incentives than studies based on the measures that are used in the debate on the European welfare state, and studies that are based on the limited variation found in Europe. 25 / 109

66 The rest of the lecture proceeds in the following way: Given the current romance with Nordic and corporatist models, it is useful to look at their performance and the performance of the welfare states. It is interesting to examine long run trends in conjunction with the short run time series that have attracted so much attention in recent policy discussions. 26 / 109

67 The rest of the lecture proceeds in the following way: Given the current romance with Nordic and corporatist models, it is useful to look at their performance and the performance of the welfare states. It is interesting to examine long run trends in conjunction with the short run time series that have attracted so much attention in recent policy discussions. Their performance is not impressive, especially if one looks at the long run trends. 26 / 109

68 Policies in place often conceal rather than solve problems and create problems for the future. Problems of measurement create serious problems in making meaningful comparisons. 27 / 109

69 Policies in place often conceal rather than solve problems and create problems for the future. Problems of measurement create serious problems in making meaningful comparisons. Long run trends in skill accumulation, in attitudes toward work, in research and development, adoption of new technology, benefit dependency, dependence on government employment are not encouraging and portend serious problems in the future for many quarters of Europe even for Scandinavian Europe. 27 / 109

70 First consider the labor market. 28 / 109

71 First consider the labor market. A new OECD Jobs report, released about a year ago, documents that some of the reforms suggested in the 1994 Jobs report have been implemented and claims that they partially account for the improved state of European labor markets. 28 / 109

72 First consider the labor market. A new OECD Jobs report, released about a year ago, documents that some of the reforms suggested in the 1994 Jobs report have been implemented and claims that they partially account for the improved state of European labor markets. European unemployment rates post-1994 are lower but they are still very high. 28 / 109

73 First consider the labor market. A new OECD Jobs report, released about a year ago, documents that some of the reforms suggested in the 1994 Jobs report have been implemented and claims that they partially account for the improved state of European labor markets. European unemployment rates post-1994 are lower but they are still very high. Apparently unemployment is much lower in corporatist Europe. 28 / 109

74 First consider the labor market. A new OECD Jobs report, released about a year ago, documents that some of the reforms suggested in the 1994 Jobs report have been implemented and claims that they partially account for the improved state of European labor markets. European unemployment rates post-1994 are lower but they are still very high. Apparently unemployment is much lower in corporatist Europe. This has led to calls by some to adopt the corporatist model. 28 / 109

75 Figure 1: Open Unemployment Rates in the OECD Open Unemployment Rates in the OECD 12.0 % of the Labor Force OECD Europe OECD USA Corporatist (DNK, FIN, NLD, NOR) 29 / 109

76 Average productivity growth is lower in EU than in the U.S. 30 / 109

77 Average productivity growth is lower in EU than in the U.S. However, it is high in the Nordic countries. 30 / 109

78 growth rates in the euro area relative to that of the countries with more flexible labour markets. Since 1996, the cumulative effect of the productivity gap between the two groups stands at 13.4% in favour of the more flexible labour market arrangements. Amongst the latter, the US workers have gained 31.1% in their productivity relative to 11% in the eurozone since Intro Themes Plan Europe Statistics Bad/Good Payroll Taxes Unions Regulation Inequality Summary Figure 2: Labor productivity growth in the business sector 4.0 Labour productivity growth in the business sector % per annum US 2.2% Flex Markets 2.1% Euro Area 1.3% / 109 3

79 GDP growth lower in past 5 years in EU than U.S. 32 / 109

80 GDP growth lower in past 5 years in EU than U.S. This is true even for corporatist Europe. 32 / 109

81 Figure 3: Real GDP Growth 5.0 Real GDP Growth % change from previous year United States Total OECD OECD Europe Corporatist (DNK, FIN, NLD, NOR) 33 / 109

82 Consider in particular the performance of one of the Nordic miracle countries Sweden the Nordic country most often studied. 34 / 109

83 Consider in particular the performance of one of the Nordic miracle countries Sweden the Nordic country most often studied. It has seen improvement recently, after the deep recession of the early 1990s, but its recovery is not so strong. 34 / 109

84 Consider in particular the performance of one of the Nordic miracle countries Sweden the Nordic country most often studied. It has seen improvement recently, after the deep recession of the early 1990s, but its recovery is not so strong. The story of Sweden is one of relative decline and a mild recent recovery. 34 / 109

85 Figure 4: PPP-Adjusted GDP per Capita in Sweden as Percent of OECD Average, Penn World Tables ( ) and OECD statistics ( ), OECD-23 = 100 Figure 1. PPP-Adjusted GDP per Capita in Sweden as Percent of OECD Average, Penn World Tables ( ) and OECD Statistics ( ), OECD-23 = Source : Davis and Henrekson (2006) 35 / 109

86 Figure 5: Cumulative Employment and Population Change in Sweden, Figure 2. Cumulative Employment and Population Change in Sweden, Thousands Total population Govt. employment Population Total employment Private sector employment employment Source : Davis and Henrekson (2006) 36 / 109

87 Figure 6: Population-Adjusted Employment Growth, Index, 1970 = United States Sweden OECD excluding the United States Source : Davis and Henrekson (2006) 37 / 109

88 But Sweden is far from being a basket case. 38 / 109

89 But Sweden is far from being a basket case. Capital taxation there is relatively low and has been cut substantially in the reform of the early 1990 s. 38 / 109

90 But Sweden is far from being a basket case. Capital taxation there is relatively low and has been cut substantially in the reform of the early 1990 s. Levels of education high. 38 / 109

91 But Sweden is far from being a basket case. Capital taxation there is relatively low and has been cut substantially in the reform of the early 1990 s. Levels of education high. The international trade sector is competing effectively in world trade, especially in ICT (Information and Computer Technology), though it is dominated by a few big successful companies. 38 / 109

92 But Sweden is far from being a basket case. Capital taxation there is relatively low and has been cut substantially in the reform of the early 1990 s. Levels of education high. The international trade sector is competing effectively in world trade, especially in ICT (Information and Computer Technology), though it is dominated by a few big successful companies. However, the world leadership in information technology comes largely from the success of large established firms. 38 / 109

93 The partial reforms instituted in the Swedish economy in the past decade were effective, but a lot of Swedish (and Finnish) growth is recovery growth a rebound from a depression as deep as anything in the 1920s and 1930s. 39 / 109

94 The partial reforms instituted in the Swedish economy in the past decade were effective, but a lot of Swedish (and Finnish) growth is recovery growth a rebound from a depression as deep as anything in the 1920s and 1930s. However, since the crisis of the early 1990s, Sweden has moved toward increasing incentives. 39 / 109

95 The partial reforms instituted in the Swedish economy in the past decade were effective, but a lot of Swedish (and Finnish) growth is recovery growth a rebound from a depression as deep as anything in the 1920s and 1930s. However, since the crisis of the early 1990s, Sweden has moved toward increasing incentives. This has helped to fuel growth. 39 / 109

96 Sweden has moved towards a more incentivized state. 40 / 109

97 Sweden has moved towards a more incentivized state. The introduction of incentives is a secret ingredient of Swedish growth. 40 / 109

98 Sweden has moved towards a more incentivized state. The introduction of incentives is a secret ingredient of Swedish growth. However, a recent NBER/SNS study concludes that there is still a lot of scope for reform and improvement in Sweden. 40 / 109

99 A focus on Sweden or the Nordic countries, however, neglects the most vibrant European economy Ireland. 41 / 109

100 A focus on Sweden or the Nordic countries, however, neglects the most vibrant European economy Ireland. Compared to Ireland, a country not often mentioned as a model for Europe by the pundits, but much admired by many smaller Eastern European countries, the growth in employment in Sweden has been very limited. 41 / 109

101 20 22 Figure 25 7: Prosperity levels (OECD=100) - GDP/CAP using current prices and current Purchase Price Parities Prosperity levels (OECD=100) GDP/CAP using current prices and current Purchase Price Parities Ireland Denmark 113 Belgium 109 Sweden 107 Finland Together with Italy, these three Scandinavian countries are the worst performing Source: OECD economies in the entire European Union. Rather than taking them as an example, 42 / 109

102 Unemployment benefits were restricted in time, while those who had been unemployed for a long time and young people found they could lose benefits if they refused to accept jobs, including low-productivity jobs below their level of training or education. The result is that productivity growth in Denmark is lower than in Sweden and Finland. Intro Themes Plan Europe Statistics Bad/Good Payroll Taxes Unions Regulation Inequality Summary Figure 8: Job creation - Total civil employment (1981=100) Job creation - Total civil employment (1981=100) Ireland Belgium 108 Denmark 112 Sweden 100 Finland Source : OECD Source: OECD These draconian measures reduced the unemployment rate, but did not eliminate 43 / 109

103 with the Anglo-Saxon liberal economy in a balanced fashion. The model is efficient. Ireland surpasses all other EU members in prosperity, job creation, social expenditure and productivity per working hour. Intro Themes Plan Europe Statistics Bad/Good Payroll Taxes Unions Regulation Inequality Summary Figure 9: Productivity per working hour (1990=100) Productivity per working hour (1990=100) Ireland Finland Sweden Belgium Denmark Source : OECD Source: OECD 44 / 109

104 Put in context, the Swedish miracle is not so miraculous. 45 / 109

105 Put in context, the Swedish miracle is not so miraculous. Ireland substantially reduced taxes on capital, raised its educational stock and opened up to world trade. 45 / 109

106 Put in context, the Swedish miracle is not so miraculous. Ireland substantially reduced taxes on capital, raised its educational stock and opened up to world trade. However, it is heavily unionized and follows a corporatist model, with centralized wage setting. 45 / 109

107 Like Finland and Sweden, the Irish experience can be interpreted as a rebound from a deep depression in the 1980 s. 46 / 109

108 Like Finland and Sweden, the Irish experience can be interpreted as a rebound from a deep depression in the 1980 s. Like the reforms in Sweden, U.K., New Zealand, Australia, Chile and Ireland, social partners cooperated in a time of crisis. 46 / 109

109 Like Finland and Sweden, the Irish experience can be interpreted as a rebound from a deep depression in the 1980 s. Like the reforms in Sweden, U.K., New Zealand, Australia, Chile and Ireland, social partners cooperated in a time of crisis. One cannot underrate the value of crisis in producing reform. The question is, can one avoid having a crisis to make meaningful reforms? 46 / 109

110 The official statistics on Nordic welfare states are highly distorted. The lower levels of unemployment found there are misleading and conceal deep problems in the society. 47 / 109

111 The official statistics on Nordic welfare states are highly distorted. The lower levels of unemployment found there are misleading and conceal deep problems in the society. Consider active labor market programs which are widely trumpeted in many policy circles as a source of success of Nordic (and other) economies. 47 / 109

112 The official statistics on Nordic welfare states are highly distorted. The lower levels of unemployment found there are misleading and conceal deep problems in the society. Consider active labor market programs which are widely trumpeted in many policy circles as a source of success of Nordic (and other) economies. There has been a substantial commitment to expenditure on active labor market programs (ALMP) in many European countries and especially in corporatist Europe. 47 / 109

113 The official statistics on Nordic welfare states are highly distorted. The lower levels of unemployment found there are misleading and conceal deep problems in the society. Consider active labor market programs which are widely trumpeted in many policy circles as a source of success of Nordic (and other) economies. There has been a substantial commitment to expenditure on active labor market programs (ALMP) in many European countries and especially in corporatist Europe. The OECD and many commentators have endorsed these programs in their official publications. 47 / 109

114 The official statistics on Nordic welfare states are highly distorted. The lower levels of unemployment found there are misleading and conceal deep problems in the society. Consider active labor market programs which are widely trumpeted in many policy circles as a source of success of Nordic (and other) economies. There has been a substantial commitment to expenditure on active labor market programs (ALMP) in many European countries and especially in corporatist Europe. The OECD and many commentators have endorsed these programs in their official publications. They attribute lower unemployment in the Nordic areas in part to ALMP. 47 / 109

115 Figure 11: Total expenditure on training and passive/active labor market programs (%GDP) Total expenditure on training and passive/active labor market programmes (%GDP) Source: OECD Labor Force Statistics, %GDP Netherlands Belgium France Germany Portugal Spain Italy Greece Denmark Norway Sweden Finland United Kingdom Australia Canada United States Source: OECD Labor Force Statistics, / 109

116 A large array of studies surveyed in Heckman, LaLonde, and Smith (1999) and Martin and Grubb (2001), as well as more recent studies, show that ALMP programs at current levels of funding have at best minor long term effects on wages and employment and most do not survive a cost-benefit test. 49 / 109

117 A large array of studies surveyed in Heckman, LaLonde, and Smith (1999) and Martin and Grubb (2001), as well as more recent studies, show that ALMP programs at current levels of funding have at best minor long term effects on wages and employment and most do not survive a cost-benefit test. Few programs lift most participants out of poverty. 49 / 109

118 A large array of studies surveyed in Heckman, LaLonde, and Smith (1999) and Martin and Grubb (2001), as well as more recent studies, show that ALMP programs at current levels of funding have at best minor long term effects on wages and employment and most do not survive a cost-benefit test. Few programs lift most participants out of poverty. A recent paper by Kruger and Forsund shows that none of the recent recovery of the Swedish economy can be attributed to ALMP. 49 / 109

119 ALMP accounting also boosts reported Swedish GDP in a spurious way. 50 / 109

120 ALMP accounting also boosts reported Swedish GDP in a spurious way. Persons in training programs are counted as government employees and their wages are counted in Swedish GDP. 50 / 109

121 ALMP accounting also boosts reported Swedish GDP in a spurious way. Persons in training programs are counted as government employees and their wages are counted in Swedish GDP. This artificially accelerates measured economic growth. 50 / 109

122 Adjusting open unemployment by disguised unemployment produces a very different image of the performance of corporatist Europe compared to the performance of the U.S. than is given in the official dialog on the success of the Nordic model. 51 / 109

123 Figure 12: Open and Full Unemployment Open and Full Unemployment The corporatist countries are DNK, FIN, NLD, NOR. Full unemployment accounts for participants in training and subsidized employment programs % Open UE, Corporatists Full UE, Corporatists 52 / 109

124 Figure 13: Differences between Open and Full Unemployment, averages Differences between Open and Full Unemployment, averages % points Norway Czech Greece UK Australia Germany Switzerland Finland Ireland Denmark Sweden Netherlands Belgium 53 / 109

125 ALMP programs concealing unemployment are only part of the reason for lower Nordic unemployment rates. 54 / 109

126 ALMP programs concealing unemployment are only part of the reason for lower Nordic unemployment rates. Europe, and Nordic Europe in particular, has many more persons dependent on government programs than the U.S. 54 / 109

127 ALMP programs concealing unemployment are only part of the reason for lower Nordic unemployment rates. Europe, and Nordic Europe in particular, has many more persons dependent on government programs than the U.S. For example consider just one program: expenditure on disability is much higher in EU than U.S. 54 / 109

128 ALMP programs concealing unemployment are only part of the reason for lower Nordic unemployment rates. Europe, and Nordic Europe in particular, has many more persons dependent on government programs than the U.S. For example consider just one program: expenditure on disability is much higher in EU than U.S. In Holland, at its peak, some 14% of all potential workers were collecting disability insurance. 54 / 109

129 Figure 14: Disability related expenditures (%GDP) in 1900,1999 Disability related expenditures (%GDP) (1900,1999) Source: OECD Social Indicators % GDP Netherlands Belgium France Germany Portugal Spain Italy Denmark Norway Sweden United Kingdom Australia Canada United States Source: OECD Social Indicators / 109

130 Figure 15: Non-employed disabled workers (% of labor force) Non-employed disabled workers (% of labor force) Source: OECD Social Indicators, Netherlands Belgium France Germany Portugal Spain Italy Denmark Norway Sweden United Kingdom Australia Canada United States Source: OECD Social Indicators, / 109

131 More generally, dependency rates for social programs are much higher in the EU and the structure of dependency is different. 57 / 109

132 More generally, dependency rates for social programs are much higher in the EU and the structure of dependency is different. Participation in welfare and transfer programs in the EU tends to be much more long-term. 57 / 109

133 More generally, dependency rates for social programs are much higher in the EU and the structure of dependency is different. Participation in welfare and transfer programs in the EU tends to be much more long-term. In many countries, the rate of dependency is high, and has gone up and not down. 57 / 109

134 More generally, dependency rates for social programs are much higher in the EU and the structure of dependency is different. Participation in welfare and transfer programs in the EU tends to be much more long-term. In many countries, the rate of dependency is high, and has gone up and not down. Participation in these programs has produced lower rates of employment in many OECD countries. 57 / 109

135 More generally, dependency rates for social programs are much higher in the EU and the structure of dependency is different. Participation in welfare and transfer programs in the EU tends to be much more long-term. In many countries, the rate of dependency is high, and has gone up and not down. Participation in these programs has produced lower rates of employment in many OECD countries. Reduces unemployment by buying people out of the workforce. 57 / 109

136 We get similar results when we adjust for employment subsidies. 58 / 109

137 We get similar results when we adjust for employment subsidies. Adjustment of the basic statistics substantially reduces the reported rate of employment growth. 58 / 109

138 Figure 16: Open and Adjusted Employment Rates in a Subset of European Countries Open and Adjusted Employment Rates in a Subset of European Countries Countries: DNK, FIN, NLD, and NOR are the corporatists. Adjusted employment subtracts participants in subsidized employment programs % of Population Emp., Corporatists Adj. Emp., Corporatist Adj. Emp., Corporatist (Excl.5.3) 59 / 109

139 Figure 17: Differences between Open and Full Employment rates, averages Differences between Open and Full Employment rates, averages Full employment rates are net of subsidized employment program participants (excl. category 5.3) % points Norway Czech Hungary United Kingdom Australia Switzerland Ireland Finland Germany Denmark Sweden Italy Netherlands Belguim France 60 / 109

140 A larger fraction of the EU and especially corporatist EU employment is in the government sector. 61 / 109

141 A larger fraction of the EU and especially corporatist EU employment is in the government sector. Government employment is an index of regulatory activity and also in most sectors government is not productive. 61 / 109

142 Figure 18: Public Sector Employment Share Public Sector Employment Share Share of Employment in the Public Sector Australia Belgium Canada Denmark Finland Germany Greece Hungary Ireland Italy Japan Mexico Netherlands Norway Poland Slovakia Spain Sweden Switzerland UK USA / 109

143 The growth in dependency on government creates a serious problem of political economy because if one adds current dependents to government workers there is considerable inertia to protect the status quo. 63 / 109

144 Moreover, to finance the high level of benefits and the ALMP programs, tax rates are high. 64 / 109

145 Moreover, to finance the high level of benefits and the ALMP programs, tax rates are high. The disincentives for work and the timing of work over the life cycle and investment in human capital are substantial. Retirement benefits are perverse at a time when the population is ageing. 64 / 109

146 Moreover, to finance the high level of benefits and the ALMP programs, tax rates are high. The disincentives for work and the timing of work over the life cycle and investment in human capital are substantial. Retirement benefits are perverse at a time when the population is ageing. It has been estimated in a recent paper by Lans Bovenberg that, for example, in Denmark, for the median person, 75% of the taxes are repaid in benefits but both taxes and benefits distort margins throughout the lifecycle at many margins. 64 / 109

147 Moreover, to finance the high level of benefits and the ALMP programs, tax rates are high. The disincentives for work and the timing of work over the life cycle and investment in human capital are substantial. Retirement benefits are perverse at a time when the population is ageing. It has been estimated in a recent paper by Lans Bovenberg that, for example, in Denmark, for the median person, 75% of the taxes are repaid in benefits but both taxes and benefits distort margins throughout the lifecycle at many margins. Incentive schedules often create poverty traps. 64 / 109

148 Figure 19: Total marginal tax wedge on personal income, including consumption taxes (% of income) for a single worker earning the average production wage without children (US: no cons. taxes available) Total marginal tax wedge on personal income, including consumption taxes (% of income) for a single worker earning the average production wage without children (US: no cons. taxes available) Source: OECD Tax Data Base, % 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Netherlands Belgium France Germany Portugal Spain Italy Greece Denmark Norway Sweden Finland United Kingdom Australia Canada United States Source: OECD Tax Database, / 109

149 Government Spending High in OECD Economies 66 / 109

150 grow. The Belgian tax rate is 9% higher than the OECD average and 15% higher than the tax level in the US and Japan. If continental Western Europe does not change its policies, its relative impoverishment today will soon turn into absolute pauperisation. Figure 22: Public spending as a % of GDP 58 Public Spending as a % of GDP Belgium 49.9 Euro OECD 40.7 Japan 37.3 USA 35.9 Ireland Source : OECD Source: OECD Its tax structure is not adapted to the challenges of globalisation. Taxes on 67 / 109

151 In recognition of the often harmful role of a large government sector, trends in the OECD are against public spending. 68 / 109

152 In recognition of the often harmful role of a large government sector, trends in the OECD are against public spending. A simple analysis shows an inverse relationship between the size of the government sector and the growth of GDP. 68 / 109

153 In recognition of the often harmful role of a large government sector, trends in the OECD are against public spending. A simple analysis shows an inverse relationship between the size of the government sector and the growth of GDP. It turns out on closer analysis that transfers are the culprit; not government expenditure per se. 68 / 109

154 Figure 23: Correlation of growth and public spending - 30 OECD countries, % 7% 7.5% Correlation of growth and public spending 30 OECD countries, (based on over 1,000 data pairs) Average GDP growth rate 6% 5% 4% 3% 2% 5.3% 3.5% 2.9% 2.2% 1.5% 1% 0% <25% 25-29% 30-39% 40-49% 50-59% >60% Public spending as % GDP Source : OECD Economic Outlook, author s analysis Source: OECD Economic Outlook, Mullally (2006) 69 / 109

155 Education is a major determinant of long run employment and unemployment. 70 / 109

156 Education is a major determinant of long run employment and unemployment. More educated workers more adaptable, innovative and easily employed. 70 / 109

157 Educational expenditure per student in tertiary education (college) is much lower in the EU than in the U.S. 71 / 109

158 Educational expenditure per student in tertiary education (college) is much lower in the EU than in the U.S. In part this is because incentives are muted. 71 / 109

159 Educational expenditure per student in tertiary education (college) is much lower in the EU than in the U.S. In part this is because incentives are muted. 1 High taxation of income. 71 / 109

160 Educational expenditure per student in tertiary education (college) is much lower in the EU than in the U.S. In part this is because incentives are muted. 1 High taxation of income. 2 Exclusive reliance on public sector resources to support education at a time when government resources are limited and fees not charged. 71 / 109

161 Educational expenditure per student in tertiary education (college) is much lower in the EU than in the U.S. In part this is because incentives are muted. 1 High taxation of income. 2 Exclusive reliance on public sector resources to support education at a time when government resources are limited and fees not charged. 3 Little reliance on the private sector as an engine of revenue as in US. Student fees are a source of revenue; screen in students with high demand. Joint ventures with business are limited. 71 / 109

162 Educational expenditure per student in tertiary education (college) is much lower in the EU than in the U.S. In part this is because incentives are muted. 1 High taxation of income. 2 Exclusive reliance on public sector resources to support education at a time when government resources are limited and fees not charged. 3 Little reliance on the private sector as an engine of revenue as in US. Student fees are a source of revenue; screen in students with high demand. Joint ventures with business are limited. 4 Sweden partially offsets this disincentive by generous subsidies to education. 71 / 109