A stress test of the welfare state -...
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A stress test of the welfare state
Public Lecture London School of Economics
European Institute 2 February 2015
Tito Boeri
Tito Boeri -- LSE – Feb. 2015
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The stress test Great Depression and Great Recession
Tito Boeri -- LSE – Feb. 2015 Fonte: Eichengreen e O’Rourke
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Germany, IIP
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Italy, IIP
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Tito Boeri -- LSE – Feb. 2015
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Homelessness in the EU (% population)
Tito Boeri -- LSE – Feb. 2015
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Stereotypes homeless = clochard
Are we sure? Tito Boeri -- LSE – Feb. 2015
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Functions of the Welfare State
1. Reduce poverty (more than inequalities per se)
2. Protect against uninsurable market risk
3. Promote labour force participation
Tito Boeri -- LSE – Feb. 2015
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Inequality and poverty are not the same thing: Italy after 2007
Brandolini 2014
Gini Absolute Poverty rate (Anchored to 60% of median income in 2006)
2006 33.7% 19.9%
2012 34.0% 27.0%
Tito Boeri -- LSE – Feb. 2015
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Outline
• The critical threshold and Social Europe(s) • The mechanism: job loss vs. job start,
unemployment vs. inactivity • The social policy response and the generational
divide. • What can be done to avert the loss of a
generation?
Tito Boeri -- LSE – Feb. 2015
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By how much should GDP decline for poverty to increase?
Tito Boeri -- LSE – Feb. 2015
Vertical axis. Variations in absolute poverty rates obtained by fixing in real terms the poverty threshold at 60% of the median income in the initial year. Sources: EU-SILC, ECHP.
-0.7%
Countries: ES IT PT GR DK FI IS NO NL AT LU DE BE UK EE HU LV LT PL
Varia
tion
in (a
bsol
ute)
pov
erty
rate
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Is it the same threshold across Social Europe(s)? No higher in Eastern and Southern Europe, no
significant correlation in the Nordics
Tito Boeri -- LSE – Feb. 2015
Southern Europe Northern Europe
-0.5%
Countries: ES IT PT GR Countries DK FI IS NO
Varia
tion
in (a
bsol
ute)
pov
erty
rate
s
Varia
tion
in (a
bsol
ute)
pov
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rate
s
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By how much should unemployment rise for poverty to increase?
Tito Boeri -- LSE – Feb. 2015
Pooled
1.3 %
Countries: ES IT PT GR DK FI IS NO NL AT LU DE BE UK EE HU LV LT PL
Varia
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in (a
bsol
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Nordics
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The second dip was worse
Tito Boeri -- LSE – Feb. 2015
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Summary
• Some countries, notably Southern (and Eastern) Europe are more vulnerable to shocks to GDP (and unemployment)
• These are precisely the countries hit by the Eurozone crisis
• Which was worse than the Great Recession in terms of its effects on poverty per given output fall
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Outline
• The critical threshold and Social Europe(s) • The mechanism: job loss vs. postponed job start,
flows to unemployment vs. inactivity • The social policy response and the generational
divide. • What can be done to avert the loss of a
generation?
Tito Boeri -- LSE – Feb. 2015
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The spatial and age divide
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Why is unemployment so much concentrated among young people?
• Search theory: labor market with frictions and job shopping; good description for youngsters
• They need to collect more information about jobs and experiment
• Employers are less informed about them • More turnover among young people (higher
hirings and separations) • During a recession hiring freeze and increase in
separations.Even if proportional across age groups would hit more the youngsters
Athens, May 12, 2014 16
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More than pure search effect?
Tito Boeri -- LSE – Feb. 2015
Dummy age in régressions of group specific unemployment against total unemployment as in Hoynes, 2011
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Is it job loss or postponed entry? (flows into poverty unemployment)
Tito Boeri -- LSE – Feb. 2015
19%
34%
47%
Southern Europe, all ages.
35%
29%
36%
Southern Europe, age<25.
from inactivity from employment from unemployment
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Responsiveness of youth unemployment to GDP variation
Tito Boeri -- LSE – Feb. 2015
Estimates of Okun’s law for youth (15-24) unemployment Source: author’s calculation on EUSILC
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The role of temporary employment
Tito Boeri -- LSE – Feb. 2015
Source: author’s calculation on EUSILC
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Summarizing
• Pathological increase in youth unemployment
in the South • Associated to job loss more than to
postponed entry • Contractual dualism increases the
unemployment response to output falls
Tito Boeri -- LSE – Feb. 2015
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Outline
• The critical threshold and Social Europe(s) • The mechanism: job loss vs. job start,
unemployment vs. inactivity • The social policy response and the generational
divide. • What can be done to avert the loss of a
generation?
Tito Boeri -- LSE – Feb. 2015
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Tito Boeri -- LSE – Feb. 2015
Coverage of UB and SA
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Coverage of UBs by age (2012)
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Poverty by age
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Should we worry about it?
• About 1/3 of youth unemployment is long-term
• Evidence from longitudinal studies that long duration unemployment can be very harmful.
• It carries implications for wages and unemployment incidence in later life (the scarring effects of unemployment). Also health problems
• It causes a lot of misery (from “happiness” studies)
Tito Boeri -- LSE – Feb. 2015
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Summary
• The welfare state does not sufficiently cover the young people notably in stress countries
• Problem related to the structure of social
protection, but also to contractual dualism • Serious issue. Risk of loss of an entire
generation.
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Outline
• Some facts about the shock: output fall, poverty and unemployment
• The social policy response. Did they cover the most needy?
• What can be done to avert the loss of a generation? National and supranational dimensions
Tito Boeri -- LSE – Feb. 2015
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Tackling Contractual Dualism at the national level
• The Italian Jobs Act • Graded security contract for all new hires in
open-ended contracts • Extension of the coverage of unemployment
benefits to workers with short contribution records and «self-employment» with only one employer
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Severance and tenure
Status quo The new open-ended contract
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Tenure (months)
Seve
ranc
e (d
ays)
Tenure (months)
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Coverage unemployment benefits
• Entitlements also for short tenures (e.g., 3 months of contributions in the last 4 years)
• Not yet social assistance of the last resort for long-term unemployed
• Too costly for a country under a nasty recession under the EC fiscal rules
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No longer convergence in social spending over GDP
Tito Boeri -- LSE – Feb. 2015
0,15
0,2
0,25
0,3
0,35
0,4
1980 1985 1990 1995 2000 2005 2009 2010 2011 2012 2013 2014
Coef
ficie
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f var
iatio
n in
tota
l soc
ial
expe
nditu
re o
n G
DP
EU Countries
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Under asymmetric shocks divergence across (relevant) jurisdictions
Decomposition of differences in unemployment rates: between and within countries
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Theil Index 2008 2009 variation 2010 2013 variation
Overall 13.6% 11.7% -14.0% 11.70% 18.80% 60.7%
Within 7.0% 4.9% -30.0% 4.40% 4.40% 0.0%
Between 6.5% 6.8% 4.6% 7.30% 14.40% 97.3%
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A EU-wide stabilizer?
• Vulnerability in banking is faced by promoting bank mergers
• Vulnerability in social policy requires more risk pooling
• A EU wide social safety net? • A EU wide unemployment benefit? • A European Equal Opportunity Contract creating
individual accounts for all new hires of youngsters to be used to buy social security or training?
Tito Boeri -- LSE – Feb. 2015
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Lessons from the stress test
• There are many things that could be done within each country to fill the gaps of the « land of the welfare state » in fighting poverty and protecting from privately uninsurable risk, but..
• Can we continue to fight poverty in case of asymmetric shocks without some shock absorbing mechanism at the supranational level?
• Do we need a welfare union rather than simply a welfare state?
Tito Boeri -- LSE – Feb. 2015