Andrea Brandolini Banca d’Italia, Department for Structural Economic Analysis LAC-EU Economic Forum 2013 “Globalization, International Trade and the Welfare State at Crossroads: Converging Views in European and Latam countries?” Santiago, January 2013 Social policies: is it the case of dismantling the welfare state?

Background Do Europe’s welfare states work? European social models Common trends? Underlying forces Conclusions Outline

Globalization, fragmentation of global supply chains, unbundling, dematerialisation, reallocation … → stronger ‘competition’ → pressure to cut tax wedge on labour to recover cost competitiveness → less resources for welfare → less stable employment relationships → shift of risk to families → greater need of welfare Growing inequalities Population ageing → longer working life → productivity of older workers and lifelong learning → long-term care → expansion of welfare Background

One important test: the Great Recession ( ) –Differences across countries, but fall in output not experienced since Great Depression –Household incomes did not fall as much as GDP –Overall, small effects on income distribution: little or no increase in poverty and inequality in majority of countries … –… but differences across age classes → largely due to tax-benefit redistribution (both automatic and discretionary) Do Europe’s welfare states work?

Great Recession: GDP & household income (indices: 2007Q1=100) Source: elaborations on Eurostat data.

Source: Jenkins, Brandolini, Micklewright and Nolan, Great Recession: GDP & household income (percentage change )

Disposable income Disposable income net of changes in taxes and benefits Source: Jenkins, Brandolini, Micklewright and Nolan, Great Recession: household income (percentage change )

Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index. Great Recession and income distribution (percentage point changes )

Source: elaborations on EU-SILC data. Share of individuals with equivalent income below 60% of median national equivalent income. Great Recession and relative poverty (percentage point changes )

More uncertain picture for post-GR period, because of fiscal consolidation –Inequality and poverty (esp. absolute) up in 2010 in Ireland, not in UK Austerity packages differ in design –Micro-simulations of measures using Euromod by H. Sutherland and co-authors Do Europe’s welfare states work?

Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index. Great Recession and income distribution (percentage point changes )

Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index. Great Recession and income distribution (percentage point changes and )

Austerity packages and household income (micro-simulated percentage point changes) Source: Euromod estimates from Figari, Tandullia and Taddei 2012.

There is no European social model, but many models Account for diversity: –Size –Structure: tax composition –Structure: in-kind vs. cash benefits –Structure: means vs. non-means-tested benefits –… European social models

Source: Eurostat. Receipts from taxes and social contributions (2007, % of GDP)

Social protection benefits: functions (2007, % of GDP) Source: Eurostat.

Social protection benefits: structure (2007, % of GDP)

Taxes and benefits are stratified systems, resulting from cumulative changes, need not correspond to a rational and organic design Systems evolve over time Account for change –Hartz reforms, Germany, –Revenu de solidarité active, France, 2009 –Universal Credit, UK, 2013 –Assicurazione sociale per l’impiego (Social Insurance for Employment), Italy, 2012 –… European social models

Family policies: “… Societies approach the relationship between family, state and market in rather different ways … A range of factors have conditioned this set of interrelations historically; the homogenizing tendency of economic growth and development being reined in by the specificities of political philosophy and politics at nation state level. … the distinctiveness of family policy across countries is being eroded. While no country has exactly the same reform programme and none is following exactly the approach endorsed by the EU and OECD, they have in common a proclivity to ‘mix and match’. The result is a hybridization of existing systems ….” (Daly 2012) Common trends?

Strictness of employment protection, (1-6 scale) Source: elaborations on OECD data

Men’s pensionable age, (years; updated to January 2011) Source: elaborations on OECD data

Net replacement rates, (%; single person, no children, 67% of average wage ) Source: elaborations on OECD data. Initial phase of unemployment; not qualifying for cash housing assistance or social assistance "top ups“

Cross-country coefficient of variation of policy indicators Source: elaborations on OECD data. Employment protection Net replacement rate Men’s pensionable age

Tendency to policy harmonization: –Commonality of underlying socio/economic change Tension between “targeting” and “universalism” –Best practices, guiding role of international organizations –“Standardization” of conceptual approach Role of evidence and theory Underlying forces

The role of evidence and theory: “… these empirical relationships are brought together with the structure of mechanism design from economic theory to determine efficiency costs, overall optimality, and improvements to tax design.” (Blundell 2012) “There are three key ingredients to any optimal tax analysis: the accurate measurement of response elasticities, the detailed description of the distribution of income, and some view of social welfare weights.” (Blundell 2012) The Mirrlees Review

Tendency to policy harmonization: –Commonality of underlying socio/economic change Tension between “targeting” and “universalism” –Best practices, guiding role of international organizations –“Standardization” of conceptual approach Role of evidence and theory Policy evaluation tools Concern for behavioural responses – but what if we move beyond utilitarianism? Underlying forces

Conclusions European tax-and-benefit systems played positive roles but need reform: citizens may not be all equally protected, context is different, spending cuts, … Reform process: –“Politics” matters –Economic theory and empirical evidence provide useful guidance, but be aware of their limits Novelty: European dimension? –Status quo vs. break-up of MU: no alternative? Van Rompuy’s EU level unemployment benefit Atkinson’s EU level child benefit

Thank you for your attention!