1. Larger Markets, Smaller Welfare States? Tito Boeri Iseo July 8, 2005

2. Outline Motivations: competitive pressures on redistributive institutions Model explaining why these institutions exist and pressures from competition in product markets Evidence on competitive pressures on these institutions Are there ways to redistribute also in more competitive environments? Enlargement means also migration: welfare shopping

3. It is the responsability of the Government to reduce the differences in income between people with high incomes and those with low incomes ? (percentage of positive answers) Source: ISSP and Eurobarometer data

5. Four social Europe(s) Composition of the social policy budget, Euros per persons Source: ESSPROS 2004. Note: unweighted average of countries in each group.

6. Dis-employment effects of redistributive institutions

7. Differences in outcomes

8. A simple model Framing the relationship between institutions and employment Providing rationale for institutions being in place Why do they differ? Effects of increased product market competition on employment and institutional tradeoffs

9. Institutions and outcomes: - motivated by policy objectives (social/protection/...) - under market imperfections Simple model: competitive equilibrium: but if attach weight to worker welfare ( total), labor cost markup factor lower employment if β small.

10. Distributionally-weighted (bargained) equilibrium

11. Institutional heterogeneity Different ways to implement this (bargained/distributionally weighted) equilibrium Tax-wedge between labour supply and demand rebating proceeds to non-employed people (UBs). Labour supply reducing policies (e.g., early retirement, disabilities) creating inactivity Minimum wages, administrative extension of collective wage agreements creating unemployment Employment protection regulations pricing out outsiders

12. For given objective (β), labor demand becomes more elastic (employment) side effects stronger, - smaller markup optimal. Effects of increased product market competition

14. Summarising effects of increased product market competition Stronger dis-employment bias of redistributive institutions Lower rents – lower wages Even more wage restraint if attempt to preserve employment levels wrt to scenario with less competition by reforming the institutions which implement the wage

15. Testing the empirical relevance Looking for natural experiments of increased market pressures European integration (Single Market), and EMU as examples. Difficult to disentangle the two effects. Double difference approach: EMU vs. non-EMU countries, before and after parity fixing

16. Lower markups? ECHP data (1995-2000) Difference between the actual wage (w) and the reservation wage (w*) stated by individuals seeking jobs in the previous wave of the survey We expect it to have declined over time and even more so in EMU countries since 1997

17. 0.0005.001 0100020003000 Euros Reservation WageWage Europe 1997-1998 0.0005.001.0015 0100020003000 Euros Reservation WageWage EMU 1997-1998

18. 0.0005.001.0015 010002000300040005000 Euros Reservation WageWage Europe 1998-1999 0.0005.001.0015 01000200030004000 Euros Reservation WageWage EMU 1998-1999

19. …and pressures on institutional reforms? fRDB inventory of labour market and social policy reforms Classified by area (EPL,NEB,pensions), direction (more or less protection) and scope (structural/marginal)

24. Political economy of reforms There are reforms going in opposite directions: more and less at the same time Dealing with political obstacles to reforms Operating along the institutional tradeoffs : mobility friendly institutions may be better for turbulent and competitive labour markets Unemployment benefits become more effective than EPL in insuring against labour market risk

25. Efficiency in providing protection against labour market risk

26. The UB/EPL trade-off

27. Summarising Redistributive policies largely present in europe because they play some useful function for someone Their employment costs are larger in larger markets, under stronger competitive pressures Need to reform institutions dealing with political obstacles to regulatory changes

28. Other challenges Eastern Enlargement Countries too small economically to matter Trade: West specializes in productions with high skill content; East in low-skill segments. Both inter and intra-industry. Modest effects on aggregate. FDIs: again too small to matter, albeit some plant de-localisation may occur

29. 0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 50 000 100 000 150 000 200 000 250 000 300 000 350 000 400 000 450 000 population PPP-GDP per capita in US$ LUX DK GER FRA ROM Poland Spain POR GRE SLO CZE HUN UK ITA EU-15EU-15 + CEEC-10 PPP-GDP and Population of the EU-15 and the CEEC-10, 1998 Sources: Eurostat, World Bank.

30. Are fears of mass migration justified? Pressures lower than anticipated by public opinion (roughly 3 per cent of the population of the NMS) They would go to regions offering more employment opportunies and suffering a lack of workers (with overheated labour markets). Thus no crowding out However potential fiscal effects via access to welfare by migrants and ensuing race-to-the bottom in welfare provisions: how serious?

31. Migration Policies Estimated migration flows to Germany

32. Migration: the option value of waiting

33. Migrants grease the wheels of European labour markets

34. Other example: Italian regions

35. Concerns about Welfare shopping Migrants receive proportionally more than natives, mainly (but not entirely) because of compositional effects Generous welfare also attract unskilled: some residual dependency And self-selection

36. Welfare dependency of EU citizens and migrants from non-EU countries

37. Because of their characteristics (predicted dependency)

38. Determinants of UB dependency

39. Migration and the Welfare System

40. Native incomes at given immigration (1 %)

41. Impact of benefits on migration from NMS

42. Summary of simulation results –Total gains from migration are large: +0.2-0.4% GDP with migration of 1% –Most gains accrue however to migrants and their families –Small gains or losses for natives in receiving and sending countries depending inter alia on assumptions on wage rigidities….

43. Conflicting effects Immigrants are younger and thus tend to positively contribute to the pension system Immigrants have more children and this is a drain on educational expenditures and family benefits Immigrants are often (but not systematically) more likely to be unemployed

44. Evidence on welfare shopping Migrants receive proportionally more than natives, mainly (but not entirely) because of compositional effects Generous welfare also attract unskilled: some residual dependency Any risk of a race to the bottom?

45. Family migration NPV n NPV w NPV n +NPV w AB CDE F

46. Family reunification policies Many EU countries are tightening family reunification policies to reduce the costs of migration Yet, un-tying decisions to migrate among family members may actually end-up increasing migration Although it would likely reduce access to welfare payments

47. CountryEU citizensnon EU citizens Germany48.139.5 France47.343.7 UK49.040.3 Spain49.742.4 Average age:

48. CountryEU citizensnon EU citizens France22.010.0 UK26.83.45 Spain15.84.9 % Receiving pensions

49. Average number of children CountryEU citizensNon EU citizens Germany0.511.05 France0.571.67 Spain0.530.87 UK0.611.46

50. CountryAge EU citizensAge non EU citizens France15.332.0 UK20.120.7 Spain1.74.9 % Receiving family benefits

51. % Receiving unemployment benefits CountryEU citizensNon EU citizens Germany6.968.57 France7.712.6 UK2.83.4 Spain6.54.9

52. UB generosity and immigrant UB dependency CountryUB generosityUB odds ratio Denmark522.9 Netherlands512.04 Belgium431.63 Finland383.06 France371.63 Spain330.75 Austria312.7 Germany281.23 UK181.21

53. Odds ratio for non educated Country odds ratio Denmark1.4 Netherlands1.85 Belgium1.3 Finland0.6 France1.53 Spain0.6 Austria1.24 Germany1.74 UK0.67

54. Policy response Restricting (transitorily) Migration? Restricting access to welfare? Co-ordinating social minima

55. Restricting migration? 2 + 3 + 2 scheme Race to the top: Austria and Germany will adopt it for 7 years; France and Belgium for 2; Netherlands, Sweden and UK reneging on previous commitment to liberalise, Danish Govt almost collapsed, Greece and Italy likely to treat new citizens just as other non-EU citizens risk of distorsions in the spatial allocation of migrants at odds with the idea of developing a common EU migration policy will induce more illegal migration, hence unskilled better a EU-wide quota at the level of baseline estimates (roughly 400,000 per year)

56. Restricting access to welfare? As done in the UK and Sweden and recommended in Germany Would make assimilation more difficult Discourage mobility of Europeans Doubtful that it would reduce pressures on welfare systems