1. Mr. Massimo M Beber Fellow in Economics Sidney Sussex College Cambridge CB2 3HU mb65@cam.ac.uk www.cus.cam.ac.uk/~mb65/mpes European Economics Lecture 2 Population and the Labour Force: Demography, Skills, and Mobility (Provisional Version: last updated 14 st October 2007) M.Phil. in Contemporary European Studies 2007/8 ©Massimo M Beber 2007

2. Objectives of Lecture 2 Demographic structure and demographic trends Investing in People –Human Capital –Social Capital The European Welfare State –Child Support –Education –National Insurance: Sickness, Unemployment, Old Age

3. Key Statistics EU 27 (490m) largest population bloc Population growth 1990-2004 (1.1-1.4%) comparable to that in high immigration countries such as Canada and US Average life expectancy at birth (2004) 77-82, comparable to other OECD’s International mobility dominates demographic trends Ageing creates major inter-generational and inter- sectoral distribution issues

4. Source: Sapir, Andre (2003) An Agenda for a Growing Europe. Making the Eu System Deliver. Report of an Independent High-Level Study Group Established on the Initiative of the President of the European Commission, Brussels: p. 127.

5. Population Growth World Main Regions

6. EU Polation Growth Proximate Determinants 1960-1997

7. EU15 Population Structure

9. Labour in the Production Process Resource Stocks –Labour –Non-produced Resources: Land, Air, Water –Produced Resources: Capital Assets Flows of Productive Services –Employment –Resource Depletion –Capital Depreciation

10. Europe’s Workforce and Ageing the EU's working-age population will be in decline by 2011 a third of the bloc's population will be over 65 by 2050. 2005 reproduction rate 1.5, well below the 2.1 required for demographic steady state.

11. Migration 4% of EU population (18.5m) are resident aliens 5% of immigrants are classified as “skilled” (but 55% in the USA)

12. Labour and the Sources of Growth Capital accumulation traditional concern of growth theory The empirical puzzle of the “residual” Labour central to the “new growth theories”: –Human Capital –Social Capital

13. The European Welfare State Welfare spending 25-35% of GDP Enhanced income security Higher consumption of (public) personal services in childcare, health care, education Reduced income inequality Virtuous aggregate and personal wealth dynamics?

14. Dimensions of Welfare Objectives –Income Security –Personal Services –Redistribution Condition of entitlement –Universal benefits through citizenship –Means-tested benefits for the poor –Occupational benefits conditional upon employment Unit of analysis –Individual –Household

15. Source: data and charting software from Eurostat’s Structural Indicators website (January 2007)

16. Source: Commission of the European Union (2003) Second Progress Report on Economic and Social Cohesion. Communication from the Commission, Brussels, Commission of the European Union: COMM (2003) 34 Final)..

17. A Crisis of the Welfare State? Financially vulnerable to shocks (demography, productivity, cyclical instability); Likely to induce distortions in the behavioural responses of individuals, whether to the provision of welfare services, or to their financing; Likely to create its own (excess) demand through moral hazard and cheating; Rendered obsolete by social changes

18. Welfare I: Birth and Childhood Not always a vote-winner Transfers to child-rearing families through –Subsidized health care for mother and baby –Subzidized parental leave –Subsidized health care for the growing child –Subzidized child care and education

19. Welfare II: Sickness Pay An intrinsically inefficient market? Universal, government-mandated sickness pay and health care insurance Negative externalities alleviated by –Experience-rated sick insurance fees –Aligned incentives: waiting days, co-insurance… –Tighter administrative controls on self-certification –More active rehabilitation measures

20. Welfare III: Health Care Two basic models –Mandatory health care insurance –Tax finances “free-at-point-of-use” health care Two basic problems: –Cost control –Rationing Two open issues: –From illness to health-damaging life-styles –From national health service to the single market in health care

21. Welfare IV: Income and Care in Old Age More market failure? Fundamental dimensions of pension provision –Funded vs. pay-as-you-go –Defined benefit/final salary vs defined contribution National pension reforms –Tinkering (with retirement age, contribution rates, marginal benefits) –PAYG, defined contribution (DC) systems –DC, funded systems Old age care –Increasing demand through social changes, and higher prices (Baumol’s Law –Cost control through competition: vouchers and regulation

22. European Welfare: Overview Intimate connection between economic integration and welfare provision Historically, and possibly functionally, the welfare state is a national state Economic integration, however, has increasingly constrained national freedom of choice But national governments have not accepted the pooled sovereignty necessary to compensate for their reduced autonomy As a result, the current situation is one of weakened welfare service provision within Europe

23. European Welfare: Development Positive integration –Commission, expert committees, UNICE, ETUC –“old” and “new” equality; health and safety; Corporatism and Social Charter Negative integration –ECJ, Commission, national governments; –Labour mobility, freedom of service provision, “competition regime” Adaptation –Private sector, national governments; –welfare services for non-nationals, privatized insurance services, privatized utilities, convergence of educational standards

24. European Welfare: Open Issues Race to the bottom (in finance, hence services) Cheating Welfare tourism Portability of pension entitlements Portability of benefit entitlements The limits of standardisation –Inefficient in the context of otherwise different national institutions –Reduces the scope for experimentation, which is crucial –ICT will increasingly make individual choices more effective in driving the standard of welfare services.

25. Source: De Groot, Nuhis and Tang (2004)

26. Social Models in the Round