Can employment be increased only at the cost of more

inequality?

Engines for More and Better Jobs in Europe

ZEW Conference, Mannheim April 2013

Torben M AndersenAarhus University

Policy questions

How to:• Maintain/increase employment rates

• Ensure equitable income distribution

Is education the answer?• Many structural problems have their root in

weak qualifications

Labour market trends

• Structural: Technology + globalization = skill-bias = task-bias

• Consequences:– Widening wage inequality– Declining employment rates

Increasing inequality

AUT

BEL

CAN

CZE

DNK

FIN

FRA

DEU

GRC

HUN

ISR

ITA

JPNLUX

NLD

NZL

NOR

PRTSWE

GBR

USA

‐2

‐1

0

1

2

3

4

5

‐8 ‐6 ‐4 ‐2 0 2 4 6

Chan

ge Gini‐d

ispo

sable

Change Gini market

Change in income inequality: mid 90s and 2000s

AUT

BEL

CAN

CZE

DNK FIN

FRADEU

GRC

HUN

ISR ITA

JPN

LUX

NLD

NZL

NOR

PRT

SWE

GBR

USA

0,2

0,22

0,24

0,26

0,28

0,3

0,32

0,34

0,36

0,38

0,4

0,2 0,3 0,4 0,5 0,6

Gini disposableincome

GINI market incomes

Inequality and redistribution

45o

Policy dilemma

• Increasing inequality

• Scope for redistribution is constrained

– Public finances are under pressure

– Trade-off between efficiency and equity -more steep trade-off due to globalization, structural changes etc.

Trade-off – efficiency and equity in the labour market

AUS

AUT

BEL

CAN

CHI

CZE

DNK

FIN

FRADEU

GRCHUIN

ISL

IRL

ISRITA

JPNKOR

NZL

NOR

POL

PRT

SLK

ESP

SWE

CHE

GBRUSA

50

55

60

65

70

75

80

85

90

0,4 0,45 0,5 0,55 0,6 0,65 0,7 0,75

Employ

men

t rate

Wage equality, D1/D5

Best practice frontier

Active vs passive redistribution policies

• Redistribution: taxes and social safety net

• Passive: Attempts to repair market outcomes (financing requirement, insurance, distortions).

Alternative:• Active: Forming market outcomes via

education/qualifications – structural change

Education and the labour market

Micro evidence:• Strong educational

gradient

– Employment– Wage– Job security– Retirement– Health– Social participation––

AUS

AUT

BEL

DNK

FINFRA

DEU

GRC

ITA

JPN

KOR

MEX

NLD

NZL

NOR

PRT

SWE

GBR

USA

0,3

0,35

0,4

0,45

0,5

0,55

0,0 0,1 0,2 0,3 0,4 0,5

Gini market income

Gini education

The redistributional trinity

InequalityEducation

Inequality Market income

InequalityDisposableincome

Qualifications              Market income Market income                   Disposable income

Equality under pressure

InequalityEducation

Inequality Market income

InequalityDisposableincome

Qualifications Market income Market income                   Disposable income

Employment gaps Low education relative to medium education

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1Slovak Rep

ublic

Poland

Hungary

Israel

Czech Re

public

Belgium

Sloven

ia

Turkey

Germany

Estonia

Austria

Italy

Ireland

Finland

Canada

France

United States

Nethe

rland

s

Luxembo

urg

Switzerland

Greece

Spain

Denm

ark

United Kingdo

m

Norway

Australia

Mexico

Swed

en

Portugal

New

 Zealand

Korea

Iceland

Ratio

2007

Large group with no education

‐20

0

20

40

60

80

100

TUR

MEX PRT

ESP

ITA ISL

GRC NZL

DNK

OEC

D¹ BEL

NLD

GBR

NOR EU FRA

LUX

AUS

HUN

EST

DEU

CHL

IRL

AUT

ISR

USA CHE

FIN

SWE

CAN

SVN

POL

SVK

CZE

KOR

Population share ‐ at least upper‐secondary school education

45‐54 35‐44 25‐34

2010

NEET: Not in employment, education or training, 15-24 age

0

5

10

15

20

25

30

35

%

2011

Demographics

• Educational explosion in +/- 1960s• Young generations significantly better

educated than older• Strong driver for changed skill-composition

of labour force• Forward – demographic tail wind ceases

Empirical literature• Skill-bias in labour demand

• Race between technology + globalization and education

• Country-studies: Improving the skill-composition of the workforce has been instrumental in countering the consequences of skill-bias in labour demand

Why public education and labour market training?

• Capital market imperfections• Myopia• Externalities• Imperfections in private markets• Social barriers• Redistribution

Active vs passive redistribution:Theoretical arguments

• Existing literature– Education on the intensive margin– Interaction: Abilities and education

• Regressive bias: Educational activities should be directed towards the more able!

• Income distribution ”repaired” via passive instruments

Robust finding?

Human capital:

• Intensive margin

• Extensive margin -increasing the share of ”skilled”

Binding constraints:

• Capital markets?

• Social barriers

Empirical evidenceSocial barriers

• Strong social gradient in education– Entry– Performance

• Social gradient present even if economic barriers are minimized

Social path dependence

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1

ISL

TUR

PRT

IRL

GBR

DNK

SWE

ESP

NLD

AUS

ITA

OEC

DPO

LFIN

LUX

DEU

AUT

NOR

GRC FRA

CHE

HUN

BEL

CZE

SLV

USA

CAN

NZL

Odds ratioIn higher education if parents have low levels of education

0

10

20

30

40

50

60

70

ISL

KOR

FIN

ESP

ITA

GRC

MEX IRL

POR

NOR

SWE

CAN

CHI

DNK

PÆOL

CHE

AUT

BEL

NZL

AUS

ISR

USA

HUN

GER CZE

Indeks Impact of social and cultural status on educational performance (PISA)

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0 10 20 30 40 50 60 70

Odds ratio

Social impact on educational performance

Education as active redistribution

• Extensive margin + social barriers

• Public education can affect the share of skilled

• Taxes finance education and transfers

• Wage distribution depends on skill composition of labour supply

Tail winds from a change in skill composition of labour supply:

– More skilled - less unskilled: More compressed wage structure

– Public budget: Less transfers more tax revenue

Redistribution

• Does tax revenue spent on education buy more redistribution than passive redistribution?

• Passive redistribution: Differences in marginal utilities of consumption

• Active redistribution: Differences in levels of utility

The efficiency-equity trade-off

Equality

Aggregateincome

Education – more skilled

Optimal policy

Active vs passive redistribution?

• Active redistribution part of the optimal package (utilitarian criterion)

• More active redistribution – less passive redistribution

• Skill-bias: More active redistribution under plausible conditions

Policy implications

• Education an important structural factor– Employment– Wage structure

• Large ”residual group” is a structural problem in the labour market which is difficult to solve via ”passive” policies

Quantity vs quality• Empirical work on productivity

– Education is important– Quality more than quantity– Base more than top

• Too much focus on quantitative measures?

• How do we ensure quality in education?

Educational inflation?

• Too much focus on tertiary education?

• Korean lesson: unbalanced educational system with too much focus on tertiary education– High unemployment rates for highly educated– Shortage of skilled workers

Educational financing

• Social barriers are most important in early schooling/education

• More specific education/training generate rents which can be appropriated by employers/employees – less need for public intervention

• More value for money!

Europe 2020 – Five headline targets

1. Employment– 75 % of the 20-64 year-olds to be employed

2. R&D / innovation– 3 % of the EU's GDP (public and private combined) to be invested in

R&D/innovation3. Climate change / energy

– greenhouse gas emissions 20 % (or even 30 %, if the conditions are right) lower than 1990

– 20 % of energy from renewables– 20 % increase in energy efficiency

4. Education– Reducing school drop-out rates below 10 %– at least 40 % of 30-34–year-olds completing third level education

5. Poverty / social exclusion– at least 20 million fewer people in or at risk of poverty and social

exclusion