Is the Western Welfare State Still Sustainable?

Transcription

1 Is the Western Welfare State Still Sustainable? James Heckman University of Chicago and University College Dublin ILO Institute March 23, / 36

2 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 / 36

3 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) 3 / 36

4 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 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% / 36

5 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) 5 / 36

6 Figure 4: PPP-Adjusted GDP per Capita in Sweden as Percent of OECD Average, Penn World Tables ( ) and OECD statistics ( ), Figure 1. PPP-Adjusted GDP per Capita in Sweden as Percent of OECD Average, OECD-23 = 100 Penn World Tables ( ) and OECD Statistics ( ), OECD-23 = Source : Davis and Henrekson (2006) 6 / 36

7 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) 7 / 36

8 Figure 6: Population-Adjusted Employment Growth, Index, 1970 = United States Sweden OECD excluding the United States Source : Davis and Henrekson (2006) 8 / 36

9 Figure 7: 70Prosperity levels (OECD=100) GDP/CAP 03 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: economies OECD in the entire European Union. Rather than taking them as an example, Europe s politicians should shun the Scandinavian recipes. 9 / 36

10 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. 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 the cause of unemployment, namely the total lack of motivation on the part of 10 / 36

11 Ireland surpasses all other EU members in prosperity, job creation, social expenditure and productivity per working hour. Figure 9: Productivity per working hour (1990=100) Productivity per working hour (1990=100) Ireland Finland Sweden Belgium Denmark Source : OECD Source: OECD 5 11 / 36

12 Figure 10: 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, / 36

13 Figure 11: 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 13 / 36

14 Figure 12: 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 14 / 36

15 Figure 13: 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 / 36

16 Figure 14: 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, / 36

17 Figure 15: 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) 17 / 36

18 Figure 16: 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 18 / 36

19 Figure 17: 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 / 36

20 Figure 18: 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, / 36

21 income is completely taxed away. In comparison, for the US the line is upward slopping, creating an incentive to move into employment. Figure 19: United States: single person METR: Marginal Effective Tax Rate Figure United States: Single person NET (2001) GROSS (2001) METR (2001) METR % of APW 21 / 36

22 Figure 20: Sweden: single person Figure Sweden: Single person NET (2001) GROSS (2001) METR (2001) METR % of APW United Kingdom: Single person NET (2001) / 36

23 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 21: 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 23 / 36

24 Figure 22: 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) The Irish experience 24 / 36

25 are losing many of our best researchers; we face more not less competition in the knowledge business; and there are consequences for our future as an economy and a civilisation. Figure 23: Proportion of age group with university education 60% Proportion of age group with university education 50% 40% 30% 20% 10% 0% OECD EU15 USA Japan Source : OECD Education at a Glance, 2005 Source: OECD Education at a Glance, 2005 Falling productivity 25 / 36

26 Figure 24: Real expenditure per student in US $ Real expenditure per student in US $ Source: OECD in Figures, Netherlands Belgium France Germany Portugal Spain Italy Greece Denmark Norway Sweden Finland United Kingdom Australia Canada United States Primary education Secondary education Tertiary education 26 / 36

27 Figure 25: Sick Leave Participation for Men and Women Sick Leave Participation for Men and Women. Three Cohorts of Men from 1974 to 1990 Three Cohorts of Women from 1974 to 1990 Participation Rate Participation Rate Age Age in years 30 years 40 years Age Age in years 30 years 40 years Sample: Labor force participants, ages Source: Ljunge (2006) 27 / 36

28 Summary Elevate the discussion of the welfare state beyond the level of endorsing one system over another. Go to the essential features that underlie the success of aspects of many systems. It s all about incentives to produce, create, succeed. 28 / 36

29 Summary Incentives to work rather than to politic. Incentives to seek jobs (sanctions in Holland and Denmark). Incentives to invest as opportunities arise, to venture, to build for the future. Incentives to move (as in the flexicurity system), not lifetime jobs. 29 / 36

30 Summary The long-run trends in modern Western welfare states are not favorable even in the Nordic countries. High levels of welfare state taxation, protection and generosity erode the dynamism of a society. (a) Builds a culture of dependency that erodes innovation. (b) Creates a level of complacency and erodes the work ethic and incentives to invest in skills and in the larger society. (c) Creates a system that protects the status quo and is very difficult to change except when a crisis appears. (d) Witness Ireland, Finland, Holland, Sweden where changes occurred only in moments of crisis. 30 / 36

31 Summary Many European welfare states are not creating incentives for investment in skills needed for performance in the global economy. The policies in place reduce incentives to work and create dependency. Need to think creatively about incentives : 1 Create incentives for mobility, but at the same time give workers some security (Denmark flexicurity ). 2 Create incentives to work (WTC, EITC, UK / US) not participate in welfare. Boost productivity and raises levels of well-being and social integration. 3 Use social insurance accounts that insure, but retain flexibility. 31 / 36

32 Summary The political economy of present arrangements in Western Europe is rigged against reform because so many persons are beneficiaries of the current system. Reforms that have occurred are small. More drastic reforms are needed. Most of the reforms that have been put in place have come in the wake of an economic crisis. There is little internal capacity for democratic societies to reform themselves without a crisis. 32 / 36

33 Summary In principle, society can undo one distortion with another. However, 1 Devising such incentives is complicated. 2 The social system is delicate and, as von Hayek often stressed, the essential details are not really known well enough to plan successfully with any precision. 3 Easy to create perverse incentives, and there are many examples. 33 / 36

34 Summary Current measurement systems used to evaluate policies and compare economic performance are flawed and conceal problems that are readily exposed once we disaggregate and look at what is going on at the individual level. Creating the will to make the necessary reforms within a democratic welfare state is a very difficult process. 34 / 36

35 Summary Successful reforms in the welfare state have all come in the wake of a crisis. The politics of the welfare state often lead to reversal of the reforms after the crisis passes. Based on the historical record, crisis is inevitable before meaningful reforms are implemented. 35 / 36

36 Summary On a more optimistic note, if the basic economic forces are analyzed in an intellectually honest way and the public is educated on the need to respect and implement incentives, we can elevate the level of the dialogue on the welfare state. Then, the reforms needed to make the welfare state viable might be achieved without the wrenching crises that have spawned most reforms in the past two decades. 36 / 36