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Comments on Comments on

Anders Forslund:Anders Forslund: Den svenska Den svenska

jämviktsarbetslösheten jämviktsarbetslösheten – – en översikten översikt

Bertil HolmlundBertil HolmlundDepartment of EconomicsDepartment of Economics

Uppsala UniversityUppsala University

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OutlineOutline TheoryTheory The Swedish developmentThe Swedish development Recent Swedish reformsRecent Swedish reforms

Unemployment insuranceUnemployment insurance The income tax systemThe income tax system Other tax reforms Other tax reforms

ConclusionsConclusions

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Equilibrium unemployment Equilibrium unemployment theorytheory

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Can fiscal policy affect the Can fiscal policy affect the equilibrium unemployment rate equilibrium unemployment rate

(NAIRU)?(NAIRU)? Yes, in an open economyYes, in an open economy NAIRU depends in general on the real NAIRU depends in general on the real

exchange rateexchange rate Fiscal policy can influence the real Fiscal policy can influence the real

exchange rateexchange rate A fiscal expansion can reduce NAIRU A fiscal expansion can reduce NAIRU

through a real appreciationthrough a real appreciation

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Equilibrium unemployment Equilibrium unemployment in an open economyin an open economy

Employment

Real exch. rate

WS/PS

AD

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A fiscal expansion in A fiscal expansion in an open economyan open economy

Employment

Real exch. rate

WS/PS

AD

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Does the real exchange Does the real exchange rate matter for rate matter for unemploymentunemployment??

Direct evidence: Lindblad and Sellin Direct evidence: Lindblad and Sellin (2003)(2003)

Indirect evidence: taxes and Indirect evidence: taxes and unemploymentunemployment The real exchange rate is part of the total The real exchange rate is part of the total

wedge between real consumer and wedge between real consumer and producer wagesproducer wages

A real appreciation is analogous to a tax cutA real appreciation is analogous to a tax cut

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Long run considerationsLong run considerations Balanced trade?Balanced trade? Relevant for the very long runRelevant for the very long run

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The Swedish The Swedish developmentdevelopment

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Why did NAIRU double Why did NAIRU double between 1990 and 1994?between 1990 and 1994?

Institutional changes? Institutional changes? Major tax reform 1991 (less progressive taxes)Major tax reform 1991 (less progressive taxes) Benefit cuts 1993Benefit cuts 1993 Coordinated wage bargaining 1991 Coordinated wage bargaining 1991

(Rehnbergavtalet)(Rehnbergavtalet) Hard to identify major changes in Hard to identify major changes in

institutions that can explain a sharp rise in institutions that can explain a sharp rise in NAIRU in the early 1990sNAIRU in the early 1990s

But NAIRU probably increased from the But NAIRU probably increased from the 1960s up to the early 1990s1960s up to the early 1990s

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Did NAIRU fall over the Did NAIRU fall over the 1990s?1990s?

Benefit cuts took placeBenefit cuts took place Imperfect wage-indexation of benefitsImperfect wage-indexation of benefits Temporary work agencies (1993)Temporary work agencies (1993) Product market competition increasedProduct market competition increased Coordinated bargaining (Industriavtalet Coordinated bargaining (Industriavtalet

1997)1997)

So NAIRU probably fell over the 1990sSo NAIRU probably fell over the 1990s

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Recent reformsRecent reforms Less generous unemployment Less generous unemployment

insuranceinsurance In-work tax credits In-work tax credits

(Jobbskatteavdrag)(Jobbskatteavdrag)

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Compare benefit cuts and Compare benefit cuts and in-work tax credits (S)in-work tax credits (S)

Income after tax when unemployed: Income after tax when unemployed: BB b=B/W b=B/W is the replacement rate is the replacement rate

Income after tax when employed: Income after tax when employed: W+SW+S Standard model:Standard model:

Unemployment depends on the replacement rate, Unemployment depends on the replacement rate, bb

Model with in-work tax credits, Model with in-work tax credits, S S :: Unemployment depends on (Unemployment depends on (bb – – ss); ); s=S/Ws=S/W

In-work tax credits and benefit cuts are In-work tax credits and benefit cuts are approximately equivalentapproximately equivalent

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Swedish reformsSwedish reforms

ˆ ( . )b b s effective repl rate

/ , /b B W s S W

ˆ 0.10 0.05 0.15b b s

The change in the effective replacement rate has been substantial

Should reduce equilibrium unemployment

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Effects on labor force Effects on labor force participationparticipation

Benefit cuts should reduce labor Benefit cuts should reduce labor force participation force participation

In-work tax credits should increase In-work tax credits should increase labor force participationlabor force participation

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Other tax reforms with Other tax reforms with implications for implications for

employmentemployment Property taxes:Property taxes:

Abolishment of the wealth taxAbolishment of the wealth tax Cuts in real estate taxesCuts in real estate taxes

Effects on labor supply?Effects on labor supply? Reduced supply on the intensive marginReduced supply on the intensive margin

In-work tax credits have income In-work tax credits have income effectseffects

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In-work tax credit 2007: In-work tax credit 2007: average tax rates by incomeaverage tax rates by income

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In-work tax credit 2007: In-work tax credit 2007: marginal tax rates by incomemarginal tax rates by income

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Income and substitution effectsIncome and substitution effectsHH hours of work, hours of work, WW the wage, the wage, Y Y nonlabor nonlabor

incomeincome

The last term is the marginal propensity to earn out of nonlabor income, mpe

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Compute the hours response from Compute the hours response from exogenous tax cuts (income exogenous tax cuts (income

effects)effects)

H YmpeH WH

Y is the income increase associated with the tax reductionWH is annual earnings

mpe = -0.10 (Imbens et al, AER Sept. 2001)

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Hours responses to exogenous tax cuts Hours responses to exogenous tax cuts (%)(%)

Tax cut (1000 SEK)Tax cut (1000 SEK)IncomIncom

ee(1000)(1000)

1010 2020 3030 4040 5050 6060 7070

300300 -0.5-0.5 -1.0-1.0 -1.4-1.4 -1.9-1.9 -2.4-2.4 -2.9-2.9 -3.3-3.3

500500 -0.4-0.4 -0.9-0.9 -1.3-1.3 -1.8-1.8 -2.2-2.2 -2.7-2.7 -3.1-3.1

700700 -0.3-0.3 -0.6-0.6 -1.0-1.0 -1.3-1.3 -1.6-1.6 -1.9-1.9 -2.2-2.2

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ConclusionsConclusions NAIRU in Sweden has increased NAIRU in Sweden has increased

gradually up to the early 1990sgradually up to the early 1990s NAIRU has probably fallen over the NAIRU has probably fallen over the

1990s1990s Benefit cuts and in-work tax credits Benefit cuts and in-work tax credits

have probably reduced the NAIRU have probably reduced the NAIRU In-work tax credits in combination In-work tax credits in combination

with other tax reforms have reduced with other tax reforms have reduced work hourswork hours