Category: Europe

The Politics of Universal Basic Income

The Universal Basic Income (UBI) has a long history. The idea to provide all citizens with an unconditional and regular income cash benefit without means-test or requirement[1] has been discussed as far back as the 18th century[2].

Thinkers on the right are attracted to its simplicity, which contrasts with the current complex welfare state arrangements in most advanced economies, its minimalism and its low adverse effects on work incentives, since it is paid irrespective of labour market participation.

On the left, people emphasise its universalism and unconditionality which would reduce the gaps in coverage of current benefits and ensure labour is decommodified, thereby increasing the power of workers to bargain for better working conditions and wages.

Its detractors are similarly located across the ideological spectrum. Many liberal economists see UBI as prohibitively expensive and inefficient insofar as it directs resources to those who may not need them.

Others on the left see UBI as a dangerous legitimisation of capitalism and an implicit acceptance that not everyone will be provided a job. They also emphasise UBI’s limited ability to address all the social risks that individuals face in a market economy.

Finally, some trade unions, particularly in Bismarckian welfare regimes, oppose what they see as releasing employers of their social responsibility. Trade unions also voice concerns that this will reduce their institutional power which lies in their key role in managing the administration of social insurance benefits.

Continue reading “The Politics of Universal Basic Income” →

Brexit and bargaining power: UK and EU compared

Europe (including UK) UK
GDP (purchasing power parity) $19.18 trillion (2016 est.) $2.788 trillion (2016 est.)
GDP (official exchange rates) $16.27 trillion (2015 est.) $2.65 trillion (2015 est.)
GDP growth 1.9% (2016 est.) 1.8% (2016 est.)
GDP – per capita (PPP) $37,800 (2016 est.) $42,500 (2016 est.)
industry share of GDP 25.50% 19.20%
Labour force 232.9 million 33.17 million (2016 est.)
Unemployment 9.5% (2015 est.) 5.1% (2016 est.)
Population below poverty line 9.80% 15% (2013 est.)
Budget surplus (+) or deficit (-) -3% of GDP -3.8% of GDP (2016 est.)
Public Debt 86.8% of GDP (2014) 92.2% of GDP (2016 est.)
Inflation rate 0.1% (2015 est.) 0.5% (2016 est.)
Population 515,052,778 (July 2016 est.) 64,430,428 (July 2016 est.)
65 years and over  19.1% (2016 est.) 17.90%
Life expectancy at birth 80.2 years 80.7 years
Hospital bed density 5.4 beds/1,000 population 2.9 beds/1,000 population (2011)
Infant mortality rate 4 deaths/1,000 live births 4.3 deaths/1,000 live births
Source: CIA world factbook [https://www.cia.gov/library/publications/the-world-factbook/]

Being unemployed in the US after the Obama presidency

Obama was elected in 2008 during the height of the crisis with much expectations that he would improve the conditions of the least well-off in American society. As his term nears its end, I use the latest OECD data to assess how unemployed individuals fare now compared to both other developed countries and to when he started his term.

In a nutshell, I show that in all plausible scenarios, individuals in the initial phase of unemployment are worse off in the US than in a median OECD or EU country and their relative situation has gotten worse since 2007, especially if they are in the middle class.

OECD data

The OECD has data on the net replacement rates for six family types in the initial phase of unemployment. The latest data available is 2014 so it is in principle plausible – though unlikely – that the situation has improved massively in the last two years and that this is not captured by my data. Note further the emphasis on the initial phase of unemployment: after a certain time in unemployment – which varies by country – unemployed lose eligibility to certain benefits (or experience falls in the replacement rate).

The OECD tax-benefit Model allows you to specify the marital situation of the family (single, one earner married couple, and two earners married couple) and whether they have children (in this case no children versus two children) for different levels of the average wage.

For simplicity I show the replacement rate for a case when the family does not qualify for cash housing assistance or social assistance in either the in-work or out-of-work situation. I also do not consider the case of earners with 150% of average wage.

The situation in 2014

Figure 1 shows the difference between the US and the EU/OECD average replacement rates in 2014. As an example consider the case of a single person with no children earning 67% of the average wage prior to becoming unemployed. In the US, the person would get 61% out of work income as a percentage of previous earnings equal to 67% of the average wage. The equivalent OECD median is 65% while the EU median is 68% so the gap between the US and the OECD median is 4 percentage points while it is 7 percentage points between the US and the EU.

Comparing different family and income situations reveals that the US is least generous compared to the OECD and EU median for ‘middle class’ (100% of average wages) families that are composed of lone parents with 2 children. The next biggest gap between the US and the OECD/EU median is for low income families with either one earner couple or a lone parent.

By contrast, low income families (67% of average wage) with two earners with or without two children would fare almost exactly the same in terms of replacement rate in the median OECD and EU country as in the US.

Figure 1: The difference between the US and the EU/OECD average replacement rates in 2014

EU US gap in 2014

Cross-national variation

In Figure 2, I show the 2014 cross-national variation in the replacement rate for a single earner with no children that does not qualify for cash housing assistance or social assistance and had previous earnings of 67% of average wage. This reveals that the US is not the worse country among developed countries (the worse is not surprisingly the UK – though note that the situation does not quite look as dire for the UK if the family qualifies for cash housing assistance). But it is located in the bottom half of the ranking.

Figure 2: 2014 replacement rate for a single earner with no children that does not qualify for cash housing assistance or social assistance and had previous earnings of 67% AW

Figure 3

Changes since 2007

In 2014, the average across all family types and both income situations for the US is 59% compared to 70% for the OECD median and 71% for the EU median. This represents a fall from 2007 where the average was 62% for the US, 60% for the OECD and 71% for the EU median.

Figure 3 shows how the gap between the US and the EU has evolved between 2007 and 2014 for different family-income scenarios. Positive values indicate that there has been an increase in the gap between what a person would get in a median EU country and what they would get in the US. Thus for instance, we see that the biggest increases in the gap has been for one  earner married couple with no children that earned 100% of the average wage prior to becoming unemployed and a single person with no children also earning 100% of the average wage prior to becoming unemployed. The next biggest increase has occurred for a lone parent with two children.

Thus, over the Obama presidency, the welfare of vulnerable middle class families in the US relative to their counterpart in the Europe has gotten worse. This is a striking result given the significant retrenchment of European welfare states that has taken place in Europe between 2008 and 2014 (the period under consideration here).

Figure 3: The difference between the EU-US gap in 2007 and in 2014

Change between 2014 and 2007.jpgDisappointing but not surprising

While disappointing, the falling welfare of the unemployed in the US is not entirely surprising from a theoretical perspective. The welfare state literature makes clear that liberal welfare regimes’ structure (e.g. targeted means tested benefits) limit the popular support for generous welfare state benefits for the unemployed that are seen as particularly undeserving.

As Rehm brillantly discusses in his latest book “Risk inequality and Welfare state“, countries with concentrated risks of unemployment among low income workers are less likely to exhibit pro-welfare state cross-class coalitions. At the same time, the US type of capitalism limits the power of the unions while making it unlikely that employers will consent – in the words of Korpi – to more generous social policies (see Varieties of Capitalism literature).

As a result, where there is no clear efficiency imperative (e.g. Obamacare in the context of objective inefficiencies in the health care sector in the US), it is therefore difficult even for a left leaning government to undertake an expansion of welfare state policies.

Buiter on the “triad of Teutonic fallacies”

Excellent recent speech by Willem Buiter on “Unemployment and inflation in the Eurozone: why has demand management failed so badly?”. As always he makes many insightfull points, but I just highlight two which I found particularly important.

The first concerns the issue independence and the scope of the mandate of the ECB:

“The notion that central banks should focus exclusively on their mandates and not be active participants in wider public policy debates, let alone be active players in the negotiations and bargaining processes that produce the political compromises that will help shape the economic, social and political evolution of our societies is, I believe, sound. Alan Blinder described this need for modesty and restraint for central bankers as “sticking to their knitting”. Both fiscal policy and structural reform have clear and often significant distributional consequences. They are, therefore, deeply political. As regards fiscal policy, this is so obvious it does not require elaboration. But structural reform too, including labour market liberalization, opening up the professions, and opening up product market to greater domestic or external competition, is not just about efficiency gains or the size of the pie, but about the distribution of the pie. What looks as an artificial barrier to entry to an economist is a source of rents to the protected worker, professional or firm. When central bankers take part in the often very partisan political debates on fiscal policy and structural reform, they compromise and undermine their independence.”

“The President of the ECB, Mario Draghi, like his predecessor Jean‐Claude Trichet, is actively trying to influence and shape euro area (EA) policies in the areas of fiscal policy and structural reform, using a range of possible monetary policy interventions as sticks or carrots to get national governments and the European Commission to do what he considers to be ‘the right things’. His recent address at the Jackson Hole Conference organized by the Federal Reserve Bank of Kansas demonstrates how broad the range of economic issues is on which the President of the ECB feels comfortable to lecture, some might saybadger, the political leadership of the EA (Draghi (2014)). Regardless of the economic merits of Draghinomics, there is something worrying, from a constitutional/legal/political/legitimacy perspective, if unelected central bank technocrats become key movers and shakers in the design and implementation of reforms and policies in areas well beyond their mandate and competence.”

The second concerns the current fallacies that hinder an appropriate policy response:

“In the Euro area, demand stimulus through fiscal policy has been severely handicapped by the widespread acceptance of the Triad of Teutonic Fallacies. The first of these is that there are reckless and/or stupid borrowers/debtors but no reckless and/or stupid lenders/creditors. As we are talking about the same transactions, that position is rather difficult to defend. It is, however, firmly believed by many living north of the Rhine, and it gives the creditors a sense of moral superiority or even outrage that diminishes their cognitive capabilities. The second fallacy is that expansionary fiscal policy is contractionary. There are indeed models in which this is the case. Provided any fiscal deficit expansion resulting from a fiscal stimulus is monetised, however, this will never be the case in a world with excess capacity and inflation below target. The third fallacy is that any increase in the balance sheet of the central bank will inevitably get monetised and lead to an undesirable increase in the rate of inflation. The fact that this is analytical nonsense does not mean it is not an influential view.”

Labour costs in 2012

Latest Eurostat labour costs statistics are out. The first figure shows the regional variation of hourly labour costs expressed in euros in 2012.

Most – though not all – Western European regions have average hourly costs superior to 30 Euros while Eastern European regions (including parts of Eastern Germany) all have less than 10 Euros average hourly costs. In between those two groups lie parts of Spain and parts of the UK, as well as Portugal, with between 10 and 20 Euros average hourly costs.

Hourly_labour_costs_levels_in_EUR_in_NUTS1,_2012

The second figure shows national differences in hourly costs expressed in Euros as well as adjusted for purchasing power (i.e. differences in cost of living in different countries). Not surprisingly, the variation in purchasing power terms is lower but does not erase cross-national differences.

It’s also interesting to note that the UK – where the immigration debate is currently heavily skewed against immigration – average hourly labour costs adjusted are lower than than the EU28 average.

Hourly_labour_costs_levels_in_EUR_and_PPS,_by_country

Does the UK really spends too much on labour market policies?

Consistent with previous trends in reforms of labour market policies, the UK government has announced yet another restriction on unemployment benefit claimants. The striking thing about these reforms is not that they are unlikely to be effective, nor that even if they were effective they probably wouldn’t make much of a difference in reducing the unemployment rate. Instead, the main issue is that they completely misrepresent the nature and extent of the problem.

Two sets of claims generally underpin the rhetoric of these reforms. The first is that benefit recipients fraud and that one must therefore restrict their access to prevent them from doing so. As official statistics (see page 13) themselves reveal, the amount of fraud is in fact very low: fraud cost only about 2.6% of expenditure on income support and 2.9% of spending on Job seeker allowance (see table below).

fraud

The second claim is that these policies simply cost too much and that the system is too generous in the UK. To assess the validity of this perception, I look at 2009 spending data on various labour market policies (from the OECD statistics website). One should distinguish between so called active labour market policies that include training schemes, employment incentives, rehabilitation programs, etc, and passive labour market policies that are mainly composed of traditional unemployment benefits.

Starting with the former, the table below shows that the UK ranks 21st among developed countries in terms of spending on active labour market policies expressed as a percentage of GDP. Scandinavian countries and continental European countries spend important amounts on these policies, while the US, Australia and Canada, along with some eastern European countries spend much less. With respect to passive labour market policies (again expressed as a percentage of GDP), the UK ranks 31st among developed countries… If one divides the spending on these policies by the unemployment rate to get a measure of relative ‘effort’ given the ‘need’, the picture still looks bleak for the UK’s unemployed.

spending on ALMPs as of GDP

PLMPs as GDP

ALMP % GDP by UR

PLMPs as GDP by UR

Of course there is significant evidence that the design of unemployment benefits (and other social policies) has important effects on recipients’ incentives to return to work. But the paradox is that as one reduces the amount that unemployed can claim, their incentive to actively seek work to avoid losing benefits actually falls (i.e. the cost of non-compliance with benefit schemes’ requirements decreases as the amount of the benefit is reduced).

In addition, for active labour market programs to be effective they need to be well-funded. In other words, improving incentives can only achieve so much if unemployed are not properly trained, there are no funds to promote their mobility, and the net gains of employment are low because an insufficient number of full time jobs . Given that the level of fraud is low and that spending on labour market policies is comparatively small, it makes no sense for the government to try to further restrict eligibility and add sanctions (on a benefit system that has already been significantly ‘activated’). Instead, there is a need to improve training and access to education, and to support aggregate demand (instead of tightening budgets) to increase the number of vacancies that have no yet recovered:

New Picture (1)

The Politics of Temporary Work Deregulation in Europe: Solving the French Puzzle

My latest paper on the politics of temporary work regulation in Western Europe.

Politics&Society
(Published online before print July 2)

Abstract

Temporary work has expanded in the last three decades with adverse implications for inequalities. Because temporary workers are a constituency that is unlikely to impose political costs, governments often choose to reduce temporary work regulations. While most European countries have indeed implemented such reforms, France went in the opposite direction, despite having both rigid labor markets and high unemployment. My argument to solve this puzzle is that where replaceability is high, workers in permanent and temporary contracts have overlapping interests, and governments choose to regulate temporary work to protect permanent workers. In turn, replaceability is higher where permanent workers’ skills are general and wage coordination is low. Logistic regression analysis of the determinants of replaceability— and how this affects governments’ reforms of temporary work regulations—supports my argument. Process tracing of French reforms also confirm that the left has tightened temporary work regulations to compensate for the high replaceability.

Public and private European Debt in 2001 and 2012

Thanks to the really good Big Picture Blog, I’ve just discovered this really cool tool developed by the Wall Street Journal to visualise the evolution of private and public debt.

Restricting the sample to Western European countries (with Canada and the US included as reference point) and comparing the debt situation in 2001 to that in 2012, reveals some interesting patterns. The Y axis displays the level of public debt as % of GDP, the X axis private debt as % of GDP, and the size of the circles indicates the level of aggregate GDP.

First in 2001, one observes the well-documented trade-off between public and private debt: southern European countries fared worse with respect to public debt but much better in terms of private debt. Thus, among European countries the main difference is more about the distribution of debt among public and private actors than the level.

Turning to 2012, a lot of countries have seen their levels of public debt rise (note that Greece prior to the bailout reached roughly 120% of public debt in 2011 – it’s now gone down to French levels). Except for Sweden and Norway that fare much better than the rest, one continues to see an possible trade-off between public and private debt. Spain as is known faces particularly problematic levels of private debt (but note also the Netherlands and Denmark).

New paper on link between labour, central banks and EMU crisis

Transfer (2013), 19(1): 89–101.
Bob Hancke
Summary
This article examines the problems of the single currency in light of the organization of labour relations in the Member States and their interaction with monetary policies. Continental (western) Europe consists of two very different systems of employment and labour relations, roughly coinciding with ‘coordinated market economies’ in the north-west of the continent, and ‘Mixed Market Economies’ in the south. These differences in employment relations and wage-setting systems implied that, against the background of a relatively restrictive one-size-fits-all monetary policy in place since 1999, the north-west of the continent systematically improved its competitiveness, while the south lost competitiveness in parallel. Small differences between the two groups of countries at the start of EMU thus were accentuated and, against the background of low growth and an almost closed E(M)U economy, the northern coordinated market economies accumulated current account surpluses while the GIIPS (Greece, Italy, Ireland, Portugal and Spain) ran into severe balance of payments problems in 2010 and 2011.