Andrea BrandoliniBanca 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, 21-22 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 taxwedge on labour to recover cost competitiveness→ less resources for welfare

→ less stable employment relationships → shift ofrisk to families → greater need of welfare

• Growing inequalities

• Population ageing

→ longer working life → productivity of olderworkers and lifelong learning → long-term care→ expansion of welfare

Background

• One important test: the Great Recession (2007-09)

– 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.

GDP Gross household disposable income Gross household adjusted disposable income

85

90

95

100

105

110United States

201220072006200520042003 2008 201120102009

85

90

95

100

105

110Euro area (17 countries)

201220072006200520042003 2008 201120102009

AT

BECA

DK

FI

FR

DE

GR

IE

IT

NL

NO

PT

SE

CHUK

ES

US

-4

-2

0

2

4

6

8

10

Pe

rcen

tage

ch

ange

in r

eal G

HD

I, 20

07-9

-10 -8 -6 -4 -2 0 2Percentage change in real GDP, 2007-9

Source: Jenkins, Brandolini, Micklewright and Nolan, 2013.

Great Recession: GDP & household income(percentage change 2007-09)

-8

-6

-4

-2

0

2

4

6

8

10Ita

ly

Gre

ece

Den

mar

k

Sw

itzer

land

Net

herla

nds

Ger

man

y

Aus

tria

Fra

nce

UK

US

A

Bel

gium

Irel

and

Spa

in

Sw

eden

Fin

land

Nor

way

Disposable income

Disposable income net of changesin taxes and benefits

Source: Jenkins, Brandolini, Micklewright and Nolan, 2013.

Great Recession: household income(percentage change 2007-09)

Anchored poverty

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Relative poverty

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Gini index

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.

Great Recession and income distribution(percentage point changes 2007-09)

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 2007-09)

-6

-5

-4

-3

-2

-1

0

1

2

3S

witz

erla

nd UK

Aus

tria

Fin

land

Por

tuga

l

Irel

and

Gre

ece

Italy

Sw

eden

Net

herla

nds

Bel

gium

Luxe

mbo

urg

Den

mar

k

Spa

in

Fra

nce

Nor

way

Ger

man

y

Less than 18 years From 18 to 64 years 65 years or over

• 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 2009-11 measures using

Euromod by H. Sutherland and co-authors

Do Europe’s welfare states work?

Anchored poverty

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Relative poverty

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Gini index

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.

Great Recession and income distribution(percentage point changes 2007-09)

Anchored poverty

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Relative poverty

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Gini index

-3

-2

-1

0

1

2

3

4

Irel

and

Sw

itzer

land

Net

herla

nds

Por

tuga

lN

orw

ayF

inla

ndB

elgi

umG

erm

any

Gre

ece

UK

Aus

tria

Fra

nce

Sw

eden

Italy

Luxe

mbo

urg

Den

mar

kS

pain

Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.

Great Recession and income distribution(percentage point changes 2007-09 and 2009-10)

-4

-2

0

1 2 3 4 5 6 7 8 9 10income decile group

IT LT UK

-8

-6

-4

-2

0

1 2 3 4 5 6 7 8 9 10income decile group

EE ES RO

-14

-12

-10

-8

-6

-4

-2

0

1 2 3 4 5 6 7 8 9 10income decile group

EL LV PT

chan

ge in

ave

rage

dis

pos

abl

e in

com

e, %

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)

0 5 10 15 20 25 30 35 40 45 50

Slovakia

Romania

Lithuania

Latvia

Estonia

Ireland

Bulgaria

Greece

Poland

Czech Rep.

Portugal

Malta

Luxembourg

Slovenia

UK

Spain

Netherlands

Germany

Cyprus

Hungary

Italy

Finland

Austria

France

Belgium

Sweden

Denmark

Taxes on incomeand wealth

Social securitycontributions

Taxes on importsand production

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

Source: Eurostat.

Total

11.0

12.0

13.2

13.7

14.0

15.4

17.5

17.5

17.8

17.8

17.8

19.0

20.2

20.8

22.3

22.3

22.6

24.2

24.6

25.4

25.5

26.7

26.7

26.9

28.0

28.6

29.2

0 5 10 15 20 25 30

Latvia

Estonia

Romania

Bulgaria

Lithuania

Slovakia

Czech Rep.

Ireland

Poland

Malta

Cyprus

Luxembourg

Spain

Slovenia

Hungary

UK

Portugal

Greece

Finland

Belgium

Italy

Netherlands

Germany

Austria

Denmark

Sweden

France

% of GDP

Sickness/health

3.4

4.0

3.5

3.7

4.3

4.7

5.9

7.2

3.9

5.2

4.5

4.9

6.4

6.7

5.7

7.6

6.4

6.8

6.5

7.3

6.6

8.6

8.0

7.0

6.4

7.5

8.7

0 5 10

% of GDP

Unemployment, family

1.8

1.6

2.4

1.8

1.8

2.6

2.5

4.6

1.4

2.2

4.4

4.6

3.8

2.7

4.7

3.5

2.6

3.6

5.6

6.1

1.8

4.8

5.1

4.6

6.7

5.1

5.5

0 5 10

% of GDP

Old age, survivors, disability

5.8

6.4

7.3

8.2

8.0

8.1

9.1

5.7

12.4

10.4

8.9

9.4

10.0

11.4

11.9

11.2

13.6

13.8

12.6

12.0

17.1

13.3

13.6

15.4

14.9

16.1

15.0

0 5 10 15 20

% of GDP

Source: Eurostat.

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

0 5 10 15 20 25 30

Latvia

Estonia

Romania

Bulgaria

Lithuania

Slovakia

Czech Rep.

Ireland

Poland

Malta

Cyprus

Luxembourg

Spain

Slovenia

Hungary

UK

Portugal

Greece

Finland

Belgium

Italy

Netherlands

Germany

Austria

Denmark

Sweden

France

Means-testedbenefits

Non means-tested benefits

0 5 10 15 20 25 30

Latvia

Estonia

Romania

Bulgaria

Lithuania

Slovakia

Czech Rep.

Ireland

Poland

Malta

Cyprus

Luxembourg

Spain

Slovenia

Hungary

UK

Portugal

Greece

Finland

Belgium

Italy

Netherlands

Germany

Austria

Denmark

Sweden

France

Benefits in kind

Cash benefits

• 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, 2003-05– 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, 1998-2008(1-6 scale)

Source: elaborations on OECD data.

1998

2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0U

nit

ed

Kin

gd

om

Ire

lan

d

Hu

ng

ary

Po

lan

d

Den

ma

rk

Cze

ch

Rep

ub

lic

Slo

vak

Re

pu

blic

Fin

lan

d

Au

stri

a

Bel

giu

m

Sw

ed

en

Ge

rma

ny

Net

he

rla

nd

s

Fra

nc

e

Sp

ain

Ita

ly

Gre

ece

Po

rtu

ga

l

50

52

54

56

58

60

62

64

66

68It

aly

Gre

ece

Bel

giu

m

Cze

ch

Rep

ub

lic

Fra

nc

e

Hu

ng

ary

Lu

xem

bo

urg

Slo

vak

Re

pu

blic

Ge

rma

ny

Au

stri

a

Fin

lan

d

Ire

lan

d

Net

he

rla

nd

s

Po

lan

d

Po

rtu

ga

l

Sp

ain

Sw

ed

en

Un

ite

d K

ing

do

m

Den

ma

rk

Men’s pensionable age, 1993-2030(years; updated to January 2011)

Source: elaborations on OECD data.

1993

2030

0

10

20

30

40

50

60

70

80

90

100U

nit

ed

Kin

gd

om

Ire

lan

d

Cze

ch

Rep

ub

lic

Ita

ly

Po

lan

d

Au

stri

a

Gre

ece

Hu

ng

ary

Ge

rma

ny

Fin

lan

d

Slo

vak

Re

pu

blic

Net

he

rla

nd

s

Fra

nc

e

Sp

ain

Bel

giu

m

Po

rtu

ga

l

Sw

ed

en

Lu

xem

bo

urg

Den

ma

rk

Net replacement rates, 2001-2010(%; 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“.

2001

2010

Cross-country coefficient of variationof policy indicators

Source: elaborations on OECD data.

0.20

0.24

0.28

0.32

1990 1995 2000 2005 2010 2015 2020 2025 2030

0.03

0.04

0.05

0.06

1990 1995 2000 2005 2010 2015 2020 2025 2030

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!