Portuguese Labour Market Reforms in the Aftermath of the Eurozone Crisis: The Problems Behind the Recovery

This is a extended repost of a blog written with Jasper Simons for Critcom, the blog of the Council of European Studies.

If one were to believe the assessments of European institutions, Portugal is on the path to recover from the severe economic crisis it suffered from 2010 onwards, and the drastic reforms implemented in employment protection, unemployment benefits and collective bargaining are starting to yield results. Portugal swiftly implemented most of the measures contained in the Memorandum of Understanding (MoU) agreed with the Troika. Since then, exports have gone up, debt accumulation slowed down and unemployment decreased as well.

However labour market restructuring came with a high price tag, and the apparently promising numbers hide somewhat less encouraging developments for the long-term recovery of the country. The imposed changes to its political economy have not only led to a considerable deterioration of social protection, but they also coincided with high levels of emigration. The labour force has shrunk, and an impending demographic problem will be very difficult to reverse.

Portugal’s pre-crisis performance within the euro area, in contrast to Greece and Spain, was rather sluggish. In the aftermath of the financial crisis, José Sócrates’ socialist government (2005-June 2011) responded with a stimulus programme to push consumption and increase investment in the real economy. Active labour market and welfare policies improving access and levels of unemployment benefits were adopted in order to maintain demand and contain rising poverty. The coverage of unemployment insurance (the share of unemployed people actually receiving benefits) had steadily improved since 2000 (Figure 1

Figure1.pngSource: Pordata

With Portugal’s fiscal position worsening, the government quickly turned to spending cuts and deregulation reforms geared towards reassuring markets. These programmes could not prevent bankruptcy, however, and Portugal was forced to request a 79 billion euro bailout with even more severe austerity and flexibilisation policies attached. The MoU included, inter alia, the revision of the labour code and severe reductions in severance and overtime payments, measures increasing the scope for the individualisation of contracts and dismissals and lowering and restricting access to unemployment benefits, which the centre-right Passos Coelho government (June 2011-November 2015) implemented.

Firstly, employment protection and severance payments (of fixed-term contract workers) have been severely affected. Although Portugal still has relatively high protection levels in the European context (and had one of the highest levels in the run-up to the crisis), no other European country has witnessed such a strong liberalisation trajectory since the crisis (see Figure 2). Alongside the flexibilisation of dismissals, minimum severance payment requirements for employers were lowered. For instance, severance pay in case of a redundancy dismissal for a worker with five years of tenure dropped from 21.7 to 14.3 weeks between 2010 and 2013. The minimum wage was frozen at 485 euros/month from 2011 onwards (565 with Christmas bonuses), until the new left-wing coalition that came to power in 2016 increased it again.

Figure 2.jpegSource: OECD

Secondly, unemployment benefits were cut and eligibility requirements tightened reducing overall benefit. If unemployment did not decrease until recently, the share of people receiving benefits did decrease right when the government needed to cut expenditure. Coverage for both social and the ordinary unemployment benefits decreased: if high unemployment levels in Southern Europe often make the headlines, it is seldom mentioned that the actual number of unemployed people who receive benefits is much lower, and Southern Europe has had a rather poor record in this respect. Interestingly, if unemployment levels have decreased, this may have as much to do with the shrinking of the labour force as with the creation of jobs: between 2008 and 2014, the labour force (people in employment or seeking work) has shrunk by 303.000 people. If the number of jobs remains stable but the labor force decreases, unemployment goes down. This partly results from discouragement of workers, but also to a large extent from emigration. In fact, emigration may have had a greater impact because, as the government admitted, the number might be twice as high as official figures display. The Portuguese population has been shrinking since the crisis, and emigration added to an impending demographic problem, with the lowest fertility rates in the EU (1.23 children per woman) (Figure 3).

Figure3.png

Source: Pordata

Thirdly, collective bargaining has been decentralised in favour of firm level and individual agreements. Reforms of, erga omnes, extension have led to sweepingly decreasing coverage levels for ordinary workers (see figure 6). Remarkably, both the socialist and centre-right governments largely implemented these policies with the support, albeit lukewarm, of the social partners. Although the larger communist CGTP-IN remained absent, the socialist UGT worked together with employer organisations and both governments on many of the reforms including most of the MoU. This came, however, at the cost of internal division, loss of membership and various general strikes of both the CGTP-IN and the UGT.       Figure4.png            Source: UGT

Alexandre Afonso is an Assistant Professor at the University of Leiden, Netherlands. Jasper Simons is a political economy graduate and former European Economic and Social Committee trainee.

 

 

How did David Cameron manage to win the 2015 elections in spite of austerity?

The poor hit by austerity don’t vote, while the rich who benefit do

How can we explain the Conservative victory in last week’s British elections in the context of the austerity measures the Tories have been pushing through since they came to office? Indeed, even if the deficit hasn’t come down near the levels announced by the Coalition, there have been net cuts in social spending since it came to power. Political economy theories usually argue that voters sanction governmnets who cut social benefits. Building on the good ratings for economic competence attributed to the Tories in opinion polls, “austerians” have been trumpeting that this is a vindication of the austerity agenda. The storyline is that austerity works for everyone, unemployment is down, and this is why the Conservative party has triumphed in the polls. However, there is clear evidence that not everybody has been better off under the Coalition austerity plans. These plans have had distinct distributional effects: the poorest households have been hit the hardest, while middle-and higher income households have come out relatively unscathed.

This victory is interesting because the common wisdom until recently was that politicians would systematically avoid cuts in public spending that would challenge their electoral prospects. This is especially important for welfare programs since the path-breaking analysis of Paul Pierson: people like social programs they are entitled to, and getting rid of them loses votes for incumbents. However, cuts in public spending didn’t hamper the electoral score of the Tories here, and I think this is due to the setup of the British welfare state and the composition of the Tory electorate.

In a nutshell, low-incomes that paid the price for welfare cuts don’t vote, and especially don’t vote Tory, while those on higher incomes for whom lower taxes are more important do vote. After the poll debacle of the election, it appears that it wasn’t “Shy Tories” that were the decisive factor, but potential Labour supporters not bothering to vote. In the graph below, I have put together two measures: the share of net income coming from the state (from here; negative values mean transfers to the state as a share of net income), and the likelihood to vote in the general elections from the British Election Study by income quintile. The latter is not a very good measure because people systematically lie when they say whether they’re going to vote. However, it reports the difference to the average across quintiles on a scale from from 1 to 5. What the graph shows is that people who receive most of their income from the state via social transfers (and who are the most likely to be hit by austerity cuts) are also those that are the least likely to go and vote. By contrast, those who are net contributors to the public budget – and have an interest in cuts to get lower taxes – are those that are the most likely to vote. As I argued elsewhere, higher income quintiles are also much more likely to vote Tory. Hence, austerity could be pursued while limiting a potential backlash because it harms those that don’t vote, and rewards those who do.

image (66)Besides this structural tendency observed about everywhere (the poor are much less likely to vote than the rich), this is also connected to some specificities of the British welfare state that make it easier for Conservative governments to retrench social programs without facing electoral sanctions. Because social programs are strongly targeted at the poor via means-testing and flat rates, the middle class basically doesn’t have an interest in welfare. The drop between middle class wages and benefits is simply too large for this group to consider it a valuable safety net. Figure 2 shows how jobseekers’ benefit is set at much lower lowers than in most other European countries. In countries of continental Europe, where the goal of social benefits is not only to preserve a basic safety net for the poor but to maintain middle class incomes in periods of unemployment or sickness, it is much more difficult to retrench benefits because the middle class also benefits from them. This is why you see people taking to the streets in France about every time the government seeks to downsize entitlement or benefit levels. In Britain, cutting them doesn’t cause much of a fuss because those that suffer don’t vote, and the middle class prefers lower taxes to social insurance.

Finally, it must be noted that the schemes that benefit the middle class as well, such as pensions and the NHS, were not cut. Pension spending was ring-fenced by the government (who was probably aware of the much higher turnout of older voters), while NHS spending is meant to increase in the parliament, probably at the expense of schemes benefitting groups with low turnout.

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Does fiscal austerity strengthen UKIP?

GraphSpendingUKIP

In their manifesto published yesterday, the Conservative party have pledged to increase funding for the NHS by 8bn a year, besides other policies that have been criticized for for not being clearly funded. Many observers have argued that all these spending increases will need to be be compensated somehow by deep cuts in other domains, such as the welfare budget, where 12bn are to be cut by 2017-2018. In this respect, the Conservative party will be continuing the policy of reductions in public spending which some believe will lead to levels unseen since the 1930s. Now another thing that the Conservatives want, it’s to prevent the rise of UKIP. Can these two things be reconciled? In the graph above, I have plotted together public spending per capita in 2012-2013 (from here) and UKIP voting intentions from the British Election Study. There is a surprising level of fit (72% of the variance explained), and the clearly negative relationship holds if we control for unemployment (data here: UKIPSpending). The less public spending there is, the more UKIP support there is. Basically, if one were to assume that this relationships was causal, it would “cost” 200 pounds of increased spending per capita to reduce the UKIP vote by 1%. I am not sure whether this fits in the long term economic plan.

A Theory of (British) University Business Cycles

Put simply, the theory of political business cycles goes like this: in the run up to elections, governments increase public spending or/and lower interest rates (if they can control them) in order to stimulate the economy and reduce unemployment. They supply voters with more goods or cheap credit as a way to make them happy so that they will re-elect them. After the elections, however, governments have to implement drastic austerity to pay for all the goodies they supplied to voters, or increase interest rates to slow down inflation triggered by cheap credit. As a whole, political business cycles can lead to phases of booms and busts, and reduce certainty for investors in a way that is ultimately damageable for the economy. This idea was one of the reasons that led central banks to become independent in most countries. By taking away monetary tools away from governments, one could make sure that they couldn’t use them for electoral purposes.

The evidence for the actual existence of political business cycles is at best mixed. However, the overall reasoning can be useful to understand the cycles that – some – British universities go through in the context of the Research Excellence Framework, the giant bureaucratic exercise set up by the government to assess its universities and allocate funds based on research quality. Essentially, the REF can fulfill the same function as elections in the theory of political business cycles, leading to cycles of boom and bust that are ultimately damageable for research and teaching. Universities in the last REF cycle were assessed based on their research output in the 5 year period before the 31st of December 2013. While universities have spent massively in research in the run-up to the last REF, many of them are now downsizing or refocusing strongly on teaching in the direct aftermath of the period of evaluation. In a very stylized way, the REF business cycle would look a little bit like this:

The Pre-REF spending boom

The motto is “research, research, research”. Universities spend significant resources on research and new hires with established track records of publications, partly by “poaching” star researchers who carried out research funded by other institutions. Part of this expansion, however, consists in fixed-term or precarious contracts that can be disposed of after the REF deadline. This touches both research and teaching. As to research, the Times Higher documents a 63% increase in 0.2 FTE (full time equivalent) contracts in the year that preceded the REF, allowing universities to submit the publications of these short-term hires in their REF submission. Universities may have offered such positions to hitherto retired academics or academics based abroad (who are not submitted to the REF by their university) as “visiting” or “research professors” as a way to buy their publications. But this also concerned increasing spending in teaching staff on irregular contracts (teaching assistants; teaching fellows) in order to free universities’ core workforce from part of their teaching duties (seminars of marking) to increase their research output. As a result, student evaluations that are so central to league tables and student enrollments suffer, as students are taught mostly by casual or junior staff. Casual or junior staff are often better and more dedicated teachers, but students may want to actually interact with the renowned researchers at their universities.

The post-REF austerity

The motto is “teaching teaching teaching”. Once the REF is over, universities re-focus on teaching as their main source of revenue, especially since it seems that there will be much less money to be distributed than anticipated after BIS blew its budget. The fixed-term teaching and research “industrial reserve army” is disposed of and teaching duties are reallocated to the core academic workforce, who is asked to teach more and mark more. Marina Warner, who resigned from the University of Essex in 2014, reports being enthusiastically encouraged to take part in the jury of the Man Booker prize in the pre-REF phase focused on “impact”, and then being told that she’d eventually have to take unpaid leave in the post-REF phase, where the things that were so praised a few months before were being flushed down the drain. However, much of the new focus on teaching does not translate in more teaching staff, but rather in increased investment in facilities and services. My own university, once the REF was over, set about to carry out a vast downsizing of its school of biomedical sciences and medicine to invest in new buildings. Emblematically, what was a cosy senior common room reserved for staff on the second floor of the King’s building has now been converted into an “informal learning space” for students. This is partly related to the format of the student surveys that have become so central as a way to assess and rank the quality of teaching: a large share of the questions in the survey actually deal with the “service” dimension (staff was accessible; timetable worked; IT resources were appropriate) rather than the actual content of courses. In line with the idea that “unleashing the forces of consumerism is the best single way we’ve got of restoring high academic standards”, student surveys are essentially like consumer surveys. What is assessed is the service that is provided rather than the quality of the content. It is a bit like writing a book or movie review where you’d give equal weight to the solidity of the cover or the comfort of the seats in the cinema as to the actual story being told.

A modest proposal to curtail the political influence of the elderly

Modern political economies are strongly skewed towards the interests of older people. In the United states, per capita spending on the old via pensions or medicare stood at $26’000, while spending on the young via child benefits or other programs was at less than $12’000 (data for the graph below from here). Pensions in particular represent a bigger share of public budgets than any other social scheme, and a large share of health spending goes to care for the elderly. In 2013, the UK spent 139 billion GBP in pensions, compared to 5.9 billion on unemployment, 18.8 on family and children and 37.8 on education. This distribution is even clearer in the case of the US, where pensions and health federal expenditure – more largely targeted at the elderly though Medicare – represented 52% of the federal budget as compared to 16% for education an 8% for other welfare expenditures. At the same time, the United States do not have statutory paid maternity leave.

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The high level of spending on the elderly is of course justified because elderly people need more state support in bad health and old age, and pensions are more expensive than other other schemes because they are meant to be the main source of income of people rather than an ancillary benefit. Many social security schemes were established at a time when poverty was a very salient risk in old age, and when lower female participation in the labour market did not require subsidised childcare or other schemes that young families now require. After the 1970s and the end of the period of high growth that followed WWII, when tighter fiscal constraints on state budgets kicked in, the door steadily closed for the development of new schemes to accompany labour market changes: the welfare state hasn’t been retrenched, but its ability to cover new risks has declined. This is what Hacker calls the policy drift. However, notwithstanding popular images about poor elderly people inherited from previous decades, a large part of this spending now goes to categories of the population that are significantly better off than the average, for instance, in Britain, in the form of fuel allowances distributed indiscriminately of income or wealth.

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This would not be less of a problem if the prospects of the young across generations were similar, but the young of today may never reach the level of prosperity and comfort of the current elderly who started their career during the period of strong growth that followed WWII. Many people worry that the benefits of our current elderly will ultimately undermine those of our future elderly, as the commitments made during the period of very high  growth of the trente glorieuses won’t be sustainable in the long term, with much lower growth rates and productivity growth than before. In Southern Europe, young generations face extremely high levels of unemployment while they are paradoxically much better qualified than their parents. Many companies implement a “last in, first out” policy when it comes to dismissals, which means that young people are systematically disadvantaged in the labour market, leading to much higher unemployment rates. When we talk about the risks of a lost generation who can’t get onto the job ladder, it’s partly because the previous generation kicked the ladder away.

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The main reason behind this is that young and older people display strikingly different patterns of electoral behaviour: old people usually vote, while young people don’t. The graphs above (data from the US census bureau) show reported voting rates for the 2012 US presidential election, as well as the share of different age groups both in the overall population entitled to vote (which excludes non-citizens, who also tend to be younger) and the population that actually votes. First, voting rates markedly increase among older citizens: reporting voting rates are about 40% for the 18-24, where they are at 73.5 for the 65-75, and decline somewhat afterwards. We need to note that the turnout a presidential elections is higher than for other elections, especially at midterms. The lower the turnout, the more it is usually biased in favour of the old. The result of these differences is that older age groups are overrepresented among voters as compared to the overall population entitled to vote, with fairly clear incentives for politicians to be especially attentive to their preferences. Hence, people between 45 and 74 represented 46% of the overall population entitled to vote in 2012, but 52% of the population who actually voted. Since life expectancy is around 78 years, it is theoretically possible to win a majority exclusively with votes from people in the second part of their lives, who are already well inserted in the labour market, have completed their education, and who don’t need childcare or maternity leave anymore, while it is not possible to win a majority only with younger people in the first half, who may need these things. The median voter, the one that politicians need to convince to win – majoritarian – elections, has become increasingly older, and she is likely to become ever older in the future.

As a consequence, politicians on the right and left engage in a rat race to court the grey vote and please the elderly: defending pensions is much more likely to win votes than childcare or education because those who benefit from the latter are much more likely to cast a ballot than those who benefit from the former. For instance, the British government has been able to implement a cap on benefits affecting mostly young people (jobseekers allowance, child benefits) almost at leisure, while it has ring-fenced pension benefits in spite of the fact that cuts in pensions would allow much more substantial savings in government budgets. In contrast, spending for child care has stayed in a stalemate. With ever lower levels of turnout among the young – partly underpinned by worse economic conditions than their parents – and an aging population, this skew is likely to become bigger and bigger. Ultimately, we may come to a society where the large majority of voters are old and don’t work, while those work and fund public spending don’t vote. The drive towards tighter immigration controls in many countries is also partly underpinned by the preferences of the elderly, for whom immigration is much more of a concern than for young people who have grown up in more multicultural settings. Incidentally, UKIP voters are also strongly overrepresented among older generations. What older UKIP voters are saying concretely is that we should fund their pensions but limit immigration levels which could fund ours.

A democracy that is biased towards people in the late stages of their lives is problematic because it is more backward-looking than forward-looking, that is, more interested in defending its acquired rights than anticipating a future that they will not live. Why should a 70-year-old care about the depletion of energy resources in 50 years time? Of course this is a somewhat caricatural way of presenting things, and each generation does not always vote with selfish motives. People may care about their children or grandchildren or simply young generations in general. But then, why do we observe the biases in spending outlined above? In Switzerland, only men were entitled to vote until 1971, and a statutory paid maternity leave was only put in place in 2005. Why did Swiss men not advocate the interests of their wives, daughters or sisters before? Because when choices have to be made with scarce resources, selfish motives tend to prevail. This also does not mean that older people are selfish, but politicians tend to project certain preferences on them in order to win votes. Hence, we need to reconfigure the incentives for politicians.

Weighting votes by expected life expectancy

There are different ways to solve the political bias towards the elderly. One is to introduce compulsory voting to compensate for the turnout deficit of the young, or to lower the voting age to tip the balance a little bakwards. Some people also advocate demeny voting, whereby parents can cast votes on behalf of their children. However, with population ageing and declining fertility rates, this is unlikely to solve the problem as the number of elderly voters will expand at a much higher rate than the number of children and young voters. Another proposed solution is the introduction of a maximum voting age, but depriving people of votes altogether is questionable. What we need is a substantial top-up in the weight of young citizens in the political process.

There is a case for tipping the balance towards the young on a permanent basis not only for pragmatic but also for normative reasons: young and old face different incentives regarding the interests of the other group even if both are selfish. Young people need to consider the interests and policies for the old because they will be old one day. In contrast, the old will unfortunately never be young again, and therefore only need to care about themselves. For instance, members of the current British government who have introduced 9k university fees and hardened access to benefits for young people have studied themselves for free, and possibly entered the labour market at a time when unpaid internships weren’t the necessary step towards a real job.

One radical way to rebalance the political power of generations would be to weight the number of votes according to the average number of years a citizen will have to live with a particular political choice. For instance, a citizen who votes at an election when he is 18 will have to deal with the consequences for 62 years, if one considers that life expectancy is about 80. By contrast somebody who is 70 will on average only deal with the consequences for 10 years. We could for instance weight the number of votes according to this criteria. In order to avoid some citizens having 60 times more political power than others, we could take the rounded square root of their expected life expectancy to reduce this imbalance to a factor of 1 to 8. People between 18 and 23 would have 8 votes, people between 24 and 37 would have 7 votes, and so on (see graph below). People reaching the average life expectancy and beyond will keep one vote. The number of votes could be adapted at each election with the increase in life expectancy.

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This system would be a departure from the 1 person, 1 vote rule, but many systems actually depart from this rule already. For instance, Wyoming has 0.18% of the US population, while California has 11.91%, yet both have the same number of senators in the US Senate. This means that citizens of Wyoming have 65.7 times more influence than Californians in this house. The system I outline here is actually less unfair, because everybody goes through the whole cycle, and nobody is systematically disadvantaged. People who die young will actually have a higher average influence on average throughout their life than people dying very old: on average, somebody born in an impoverished area of Glasgow, where life expectancy is shorter, will have had more average influence on political decisions than somebody born in Kensington. Such a reform of the electoral system could also have interesting redistributive properties. Empowering young people is also empowering people who are on average less well-off.

Of course, the establishment of such a system would require substantial constitutional amendments decided within the current system biased towards the old, and are therefore politically suicidal. In order to restore the power of of the young, what we need are political kamikazes.

Dealing with email bankruptcy

On January 1st, New York Times journalist Nick Bilton, acknowledging that he would never be able to answer all of them, deleted a backlog of 46,315 unanswered emails and, officially declared email bankruptcy. A number of high-profile individuals have declared email bankruptcy over the last decade, the first being Lawrence Lessig in 2004. Just like you would declare it impossible to pay back your debts, by declaring email bankruptcy you acknowledge that is reasonably impossible to answer all your backlog of emails, you delete all of them and officially notify your whole address list with an apologetic email along these lines:

Dear person who has sent me an email over the last 4 years,

Having accumulated a completely unmanageable number of unanswered emails, I had to take the difficult decision to delete all of them. I sincerely apologise for letting you down. If you want me to answer your email, please re-send it to me. I promise that I will try to keep up with emails in the future.

Sincerely,

The problem with this procedure is that it constitutes what can be called a disorderly default. Imagine that any individual, firm or government could decide overnight that they didn’t need to pay back their debts: it would be chaos. Nobody would lend money to anyone in fear of not getting their money back. Similarly, a disorderly email bankruptcy can have dramatic consequences. Why would I send emails to people if they can decide at any time that they don’t need to reply? With such a level of uncertainty, in the long run nobody will be sending emails to anyone. If you think about it, there is no reason why we should deal with email bankruptcy differently from a “normal” bankruptcy. We need procedures to make sure that people will reply to their emails, while at the same time helping individuals overwhelmed by a mountain of unanswered emails.

An obvious solution would be an email backlog restructuring procedure. First, individuals should formally file in a formal request for email bankruptcy (below) to be placed under the protection of the state. You don’t want the enforcers of the people you owe replies to come break your fingers. Second, individuals would be placed under the monitoring of a third party and granted more time to reply to their emails. Bailiffs could come to your house and make sure that you devote all your time to replying to the emails. Alternatively, this third party could reply to the unanswered emails, but in exchange of a drastic email adjustment programme to make sure that insolvent emailers will always reply to their emails in future. Of course, the emails answered by the third party should be paid back with an interest. A central goal of these email adjustment programs would be to teach you not to send tons of emails eliciting replies that you won’t be able to answer, and punish you for profligate emailing behavior.  Eventually, in last resort, an email backlog “haircut” can be envisaged in case individuals have to default, but the conditions imposed on the debtor should be even harsher for instance by auctioning their computer material. Even then, this solution would still be less catastrophic than the disorderly email bankruptcies described above.

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What if More Austerity Meant More Immigration?

Since January 1st, citizens from Romania and Bulgaria can freely access the labour markets of all EU member states, including the United Kingdom. Fed by the threat of UKIP and a tabloid press that doesn’t really bother with facts, both Tories and Labour are up in arms in the face of a potential “invasion” of Romanians and Bulgarian who are going to swamp Britain to take advantage of its generous welfare state and its great weather. On January 1st, MPs Keith Vaz (Labour) and Mark Reckless (Conservative) were at Luton airport to “welcome” (pronounce “deter”) Romanians arriving in Britain. Before the new year, the government promptly applied restrictions on access to welfare benefits drawing on the idea that “benefit tourism” is a main driver of migration flows. A report which showed that these fears were unfounded was duly shelved before Christmas because it was “too positive” about the impact of immigration on the British economy.

What is striking about this debate is that the political actors who are the most vocal against immigration are also the most vocal about fiscal retrenchment and reductions in welfare spending. However, nobody ever mentions that cuts in welfare spending may actually foster immigration rather than diminish it.  The common story is that retrenching the welfare state will deter immigration by making the country less attractive for migrants. At best, the welfare system may play no role at all, and at worst, retrenching the welfare state may actually increase immigration because the retreat of the state creates a demand for low-cost private services, for instance in care work, where migrants are over-represented.

First, it must be borne in mind that even if the welfare system was a driver of immigration, the British welfare state is not particularly attractive as compared to most other European countries. The thing is, in the UK it is completely possible for opinion-makers to ignore everything that is taking place “overseas” because nobody really cares. However, most available international data indicates that out-of-work benefits in Britain are actually much lower than most other countries of Western Europe (see also a comparison of net replacement rates for unemployment benefits here). The NHS is a different case because of its relatively universal access (this has been restricted for foreign nationals though) but is a service-based scheme that does not provide the cash transfers that could cause this so-called benefit tourism. If you were a benefit tourist, would you really come to a country with free healthcare but very low unemployment benefits?

Now, available evidence tends to indicate that welfare state generosity has no real impact on immigration flows. The opening of the labour market to Eastern and central European countries in 2004 offered a nice natural experiment: only three countries chose to open their labour markets right away to citizens of new member states: the UK, Ireland and Sweden. The Swedish welfare state is arguably one of the most extensive in the world, and if welfare provision was really the main driver of immigration, Sweden would have faced a much bigger flow of migrants than Britain. However, this did not happen. Between 2004 and 2011, Sweden received an average of 5000 Polish migrants per year, while the UK received 45’000. Immigration did increase after 2004, but nowhere near the proportion its big welfare state would suggest. Independently of welfare protection, demand for labour and wage differentials seem to play a much bigger role.

In theory, there are some valid reasons to believe that an extensive welfare state actually reduces the demand for foreign labour rather than stimulate it. First, to pay for an extensive welfare state such as that of Sweden or Denmark, you need fairly high taxes, which makes labour in general more expensive. Extensive collective bargaining coverage and strong trade unions makes it difficult to bypass this for employers, which means that it is more difficult to employ cheap low-skilled foreign labour in a profitable manner. Since a smaller proportion of the wages paid are actually determined by the individual characteristics of the workers, but rather by a whole set of non-market regulations and agreements which lift up wages, the lower wages that migrants may be ready to accept make a smaller marginal difference: taxes and collectively agreed wages have to be paid anyway. Moreover, since labour is expensive, employers have an incentive to invest in it. The workforce tends to be more qualified and there is a smaller demand for low-skilled cheap labour than in a more deregulated labour market. In short, this type of institutional arrangement tends to create a “race to the top” in skills and social protection, and there are therefore fewer low-skilled, cheap jobs that are typically left to immigrants. In Sweden, however, employers have sought to break this by using posted workers formally employed in other countries. This is pretty much what the much debated Laval case was about. Hence, if you reduce welfare and deregulate labour markets, you actually make it more profitable to employ migrants rather than natives, assuming that migrants are really willing to accept lower wages. More welfare, fewer migrants.

The second mechanism whereby welfare retrenchment may increase immigration is through the replacement of subsidised public social services by cheap private services that only migrants are willing to provide. In many ways, if the state cannot provide subsidized public services at a low cost, individuals will seek to buy them privately at a low cost as well, which often means from migrant workers on low wages. In  countries where the state was unable to cover needs for care for the elderly, such as in Italy, this task is already assumed to a large extent by migrant, mostly female, workers employed on an informal basis. In Britain, funding for social care has been cut by about 20% between 2010 and 2013. Since most of the care is not provided directly by the state but by private or non-profit providers that the state pays, this concretely means greater pressure on these providers on deliver the same level of service but for less money. The only way to do it is to reduce wages. In November, it was revealed that almost half of the firms delivering elderly care have been paying their workers below the minimum wage, and infamous zero-hour contracts are widespread. Unsurprisingly, this sector relies heavily on migrant workers. Research pointed out that half of the workforce in the care  sector in the London area was constituted by migrants. As working conditions in these sectors deteriorate as a result of spending cuts, they are bound to increasingly rely on migrant workers because they are the only ones willing to accept them. This is why the government’s policy stance about welfare and immigration is simply startling: like an arsonist calling the fire brigade, they are blaming a phenomenon that they are causing in the first place.

Reforming Southern Europe: How to Square the Triangle of Employment, Fiscal Austerity and Inequality?

Mass unemployment is probably one of the most worrying features of the Eurozone crisis. As youth unemployment is hitting record levels (one in four people under 25 in Europe and more than one in two in Spain are officially out of work), many observers are warning against the rise of a “lost generation”, especially in Southern Europe. The European central Bank and international financial situations may have developed an obsession for deficit and debt reduction, but mass unemployment can be considered a much more worrying problem in the long term for both workers and governments. For workers, skills deteriorate when they are out of work, and as technology goes forward, their likelihood of finding a job tend to decrease with the duration of unemployment. For governments, each period of mass unemployment tends to increase the incompressible threshold of structural unemployment. When the number of unemployed increases en masse, it is very difficult to come back to the initial level even in the case of an upturn, as many workers driven out of work for too long are never able to come back into employment again. The problem is even more serious when unemployment concerns primarily young people at the beginning of their career, who cannot even start climbing the ladder in the first place.

In this context, what can governments do, and how do different types of reform impact on public deficits and inequality? In the late 1990s, political economists have argued that service economies, where economic and productivity growth tend to be much lower than in the past, entail a “trilemma” between high employment, low inequality and budgetary restraint. Following this idea, governments in service economies have to choose two out of these three objectives, as all three of them cannot be reconciled.

For many Continental European countries with so-called “Bismarckian” welfare states such as France, Germany, Italy or Spain, the common wisdom is that employment has often been sacrificed to reduce inequality and – often unsuccessfully – contain taxation at the same time. Redistribution is funded through payroll contributions levied on wages rather than by general taxes, which tends to price out low-skilled workers. The amount of contributions employers have to pay even on low salaries can make them too expensive, and earnings-related benefits and minimum wages possibly prevent the entry of low-skilled workers. In Mediterranean countries like Spain, Italy, Greece or Portugal, the problem also often emphasised is the rigidity of labour laws which tend to protect the “insiders” – people who have entered the labour market in the period of growth in the 1960s to 1990s, making it harder for new entrants to get in. The result of this is that young people are much more affected by unemployment in spite of the fact that they are typically much more qualified than their parents. On top of this, poor childcare inherited from a strong *male breadwinner” bias combined with the loosening of family structures typically hampers female employment in Southern Europe: in 2012, only 54% of Spanish women and 50.5% of Italian women between 20 and 64 were in employment (64% and 71 for men respectively). The corresponding figure for Denmark was 72.2 (females) and 78.8 (males). Even considering lower employment rates in general, the gender gap in employment is typically greater in the South.

The first strategy governments can pursue to increase employment while keeping a lid on public expenditure is the Anglo-Saxon way, namely mass deregulation to price in workers again at the bottom of the labour market. It is also the one that is being pushed by European institutions, Germany and the current Spanish government. By cutting down payroll contributions and benefits, what is sought is the expansion of the labour market downwards, through low wage-jobs. It is understandable that Germany is pushing for this kind of solution because it is the strategy that it has pursued itself since the early 2000s, with the rise of mini-jobs, the Hartz reforms and a deliberate strategy of wage compression by German trade unions. The obvious direct consequences of this strategy are the higher income inequalities typical of Anglo-Saxon economies. Income inequalities in Germany also seem to have increased considerably in recent years in spite of the “jobs miracle”. It is unclear, however, whether deregulation is really able to increase employment across a wider set of countries. Moreover, the internal devaluation strategy pursued by Germany to boost exports and run a positive trade balance can only work if other countries run a trade deficit: we cannot all be Germans at the same time.

The second strategy is the Scandinavian way. It consists in the massive expansion of the public sector to provide a wide variety of social services funded by high levels of taxes. Countries like Denmark, Norway or Sweden tend to have higher employment levels at least in part because the state provides or subsidises a large variety of quality social services such as childcare, which not only employ a large workforce, but also tend to facilitate female employment. Affordable childcare allows both members of households to be employed, while its absence often forces a member of South European households – typically the woman – to choose to stay at home. Moreover, theses countries invest massively in active labour market policies. Obviously, the price to pay for this strategy is very high levels of taxation to fund the state, or alternatively, an increase in borrowing. In the context of fiscal austerity that pervades almost all European countries, this is politically very difficult, or even impossible. Countries like France, however, still have large programs of publicly subsidised employment for young people. In 2013, a quarter of jobs held by people below 25 were partly subsidised by the state.

Employment ratio 20-64 by gender
Employment ratio 20-64 by gender

If deregulation creates inequality and is not guaranteed to work, while public sector expansion is very expensive, what is left? In a forthcoming book chapter with Jelle Visser, we argue that there may be a third “liberal-corporatist” way based on the experience of countries such as Switzerland and the Netherlands, where employment participation is high, inequality is low to moderate, and the public sector is nowhere near the size of Scandinavian countries. This model relies on the widespread use of part-time employment and strong systems of occupational skills lifting wages in the bottom of the labour market. The Netherlands and Switzerland have the highest incidence of part-time employment in the OECD, and Switzerland has one of the lowest income inequality levels in the OECD in spite of the fact that it redistributes as little as the United States. In a context where public sector expansion and extensive subsidised childcare as found in Scandinavian countries are politically difficult to put in place, the increase of part-time employment has been a private response allowing women in particular to reconcile childcare with labour market participation. Interestingly, the places where the Dutch and Swiss social models perform particularly well are those in which Southern European countries are lacking, notably for female, elderly, and youth employment. The latter is largely due to strong systems of vocational training which ensure a better transition from school to work, so that the alternative is not only between dropping out of school with low skills or going to university, a system which also tends to foster income inequalities. In all these respects, they can represent a politically viable way to escape the trilemma outlined above at a lower cost in terms of public finances and inequality.

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Incidence of part-time employment, 2011

Of course, any supply-side reform agenda is constrained by the availability of demand, which is a massive problem in Southern Europe. Governments are cutting spending at a time when households are reducing their consumption. Supply-side reforms are of little incidence if nobody at home or abroad is buying anything. In Switzerland and the Netherlands as well, high employment has been underpinned by some form of demand-stimulating factor whose sustainability is uncertain. In the Netherlands, tax exemptions on mortgages have encouraged ever-inflating house prices and the highest levels of mortgage debt in Europe. At the moment, the country has fallen in recession, and the government has cut spending at a time when households are seeking to reduce their debt level. In short, while the Dutch government was a harsh advocate of austerity in Southern Europe, it finds itself entrapped in the same kind of “balance-sheet recession” that Spain is facing. In Switzerland, domestic demand has been maintained by very high levels of immigration since the mid-2000s, compensating for declining exports due to the appreciation of the Swiss franc (as a consequence of the depreciation of the euro), and anaemic demand in the Eurozone. The sustainability of this strategy can be questioned as well, as population growth cannot be pursued indefinitely.

This article was first published under a different title on the LSE’s EUROPP blog, and will be published in Spanish by Agenda Publica.

How Margaret Thatcher Made Britain a Soviet State

When I moved to the United Kingdom a year and a half ago, I thought that I was moving to a free market experiment. Margaret Thatcher and her followers – from Blair to Cameron – had crushed the unions, liberalized labour and financial markets, privatized public services, reformed the state following business principles and reduced its interference in the economy. They had freed us from the threat of socialism, its bloated Kafkaesque bureaucracies and its mountains of red tape. I was aware of the massive social inequalities which had emerged as a result, but this was perhaps the price to pay for more freedom and a smaller state, for everything being faster, more fluid, agile and efficient.

The Kafka Bank

I kept this illusion for about three days after moving here, until I tried to open a British bank account. I chose a bank because of its declared “ethical” and responsible approach – it turned out that it was in fact severely mismanaged and its chairman was an avid user of Crystal meth and male prostitutes, but this is irrelevant here. To open a bank account, you need to prove that you live at a particular address. However, there is no government authority where you can go to register and prove that you live somewhere. Because of its concern for the freedom of individuals, Britain also doesn’t have ID cards. A plan to introduce them was axed by the current government in 2010. You have to pay council tax where you live, but it can be in the name of your flatmates or your landlord. The bank in question would not accept a private tenancy agreement as a proof of address, because the private tenancy market is a dodgy business full of rapacious landlords and greedy estate agents. What they accept to prove your address are letters from a bank, but this implies that you already have a bank. The only option for me to prove my address were utility bills, for which of course I needed to wait until the end of the month. As I didn’t have a British bank account and my employer wouldn’t pay my salary on a foreign bank account, I received my first salary in the form of a cheque that I could not cash (or only at these dodgy pawnbroker shops where they charge you a 15% fee).

After a month, I received my energy bill, or more precisely an internet link to an online energy bill. Energy companies strongly encourage or force you to opt for e-billing and direct debit, and they are unwilling to send you actual paper bills, in order to save costs. The friendly Scottish person from the call centre made it clear that it was much better for trees and my wallet to go paperless. I brought the prints to the bank. They didn’t accept them as a valid proof of address because they hadn’t been sent to my physical address. I also tried with a TV license, which I had also bought paperless after I had arrived. I called the TV licensing authority asking them to send me an actual paper license. After a number of requests, what they sent me was a certificate certifying that my TV license existed online. The bank said no again because it wasn’t the actual TV license. Eventually, I managed to have utility bills sent to my address (energy companies charge you a fee for that). Once again, the bank refused because the street number on the bill was “22C”, while the address that had been entered in their “processing facility” was “22”. The lady at the bank said that the computer system in their division in charge of regulatory compliance with money laundering regulations probably wouldn’t accept it if it wasn’t exactly identical. Since the financial crisis, banks had become very careful. If I wanted the “22” to be changed into “22C”, I needed to reapply.

I gave up and went to another bank that had an agreement with my university. Supposedly, you could open a bank account with them easily online. Again because of money laundering regulations, you have to indicate where you’ve lived for the last three years. For some reason, it wasn’t possible to enter a foreign postcode, so online didn’t work. I had an employee sent to my office, who didn’t know either why foreign postcodes couldn’t be introduced online. “It’s out of the ordinary” he said. Of course, nobody that has lived abroad ever moves to London, except perhaps for a few millions a year. In total, it took 7 weeks to open a bank account, right on time to receive my second salary. I am told that it would be tricky to get a British credit card because I have no “credit history” in Britain, so I didn’t even try.

Before moving to the UK, I lived for a year in Germany, the country of rules everywhere and rigid old-style bureaucracies. To open my German account, I took my tenancy agreement to the local authority (Bezirksamt), they stamped a certificate that I brought to the bank, and my account was open within a few days. Now I assume that one of the reasons why British banks are so absurdly picky, it’s because you can apparently do a lot more with a British bank account than with a German bank account: fee-free overdraft, special conditions for loans, etc. Actually, you have access to a lot of things that can go wrong, and with which you can get yourself and the bank in trouble if you default. In Germany, as everybody knows, you are not supposed to spend more than what you have, so you simply can’t go in the red. For British banks willing to take advantage of deregulated financial markets, having customers is almost a liability, which is why they need a lot more guarantees to make sure that they are reliable. However, banks cannot obtain these guarantees from the state because the state doesn’t want to interfere in your freedom, and they don’t want them from other private companies because they know that they are as greedy and untrustworthy as they are themselves, notably because they have all engaged in never-ending chains of subcontracting which dilute responsibility. The only way they found to get this insurance is by requiring endless piles of paperwork from you. More economic freedom, more paperwork, more soul-sucking bureaucracy.

Freer Markets, More Rules

Think of the following analogy: one day, you decide to no longer accompany your small son or daughter to school to leave them more freedom. However, to make sure that they won’t talk to strangers (which they might do) you make them fill in a 50-page questionnaire every day asking them if they understand all the different kinds of risks they may be exposed to, you call them every 30 seconds to check that they’re alright, you hire a private eye to check on them along the way, and another to monitor the first private eye. My understanding is that the British political economy works a bit along these lines. Governments have privatized, liberalized and outsourced, but every time they’ve done so, they’ve had to set up giant bureaucracies to monitor, control and repair the blunders of the market, and so do private companies to enforce and take advantage of competition. When you have freer markets, you need more rules. Britain and the United States have the most liberal labour and financial markets in advanced countries. Since there is so much freedom, why is there one CCTV for every eleven people living in Britain, and the United States have the largest rates of incarceration in the world? Since the UK doesn’t have ID cards and nobody is required to carry a document of identification to preserve individual freedom, it is actually easier for the police to take you to the policy station to identify who you are. While you seek to free market and individuals, you eventually end up establishing systems of control that are even more intrusive and alienating.

The problem is that when you don’t set up bureaucracies to monitor and control private markets, things usually go wrong, and the state has to step in to repair the damages with new bureaucracies, new commissions of enquiry and new regulatory authorities. Recently, Britain has privatized its probation services, or the monitoring of offenders on parole. It turned out that the company in charge of this had massively overcharged for this service, leading its chairman to step down. Now, you need more bureaucrats to check that the private service providers actually do their job, and more judges to sue them when they commit abuses, sometime dramatic ones. Security services are outsourced, but the army and police had to step in when G4S totally mismanaged the security of the 2012 London Olympics. Railways were privatized, but the company which managed the British Railway tracks had to be partly re-nationalised after a major crash. The British minimum wage is low not to outprice low-skilled workers, but the Treasury pays 3.2 billion a year in tax credits for low wages. It seems to be the same story time and again. The more market you have, the more state and bureaucracy you need after all.

Bureaucratization in British Universities

British universities are a particularly dramatic example of market-induced bureaucratisation. Since I have arrived, I discover the existence of a new rule, a new subcommittee or a new fancy job title (usually with word “strategic” in it) more or less everyday. If I go to a conference, I should fill in a risk assessment form listing 68 types of risks that I may face abroad, including whether I could be bitten by venomous snakes. I should also indicate the address of the closest hospital to the conference venue. The interesting thing about a large part of this bureaucracy is that it seems to have been created to respond to the needs of competition, while competition was supposed to make everything more efficient. Universities are in competition in the domain of teaching to attract students – and therefore income from fees – and in the domain of research, as government money is attributed on the basis of their research performance. As to teaching, as universities are desperate to attract as many students as they can, they have invested massively in marketing, recruitment and advertising services. In the US, for-profit universities are already spending more on marketing than in teaching (20% vs 17%, a report showed). Estimates for the UK are about 4 to 5% in marketing, but most experts predict a massive increase in future years. The consequence, in a context where resources do not increase because the total number of students is capped, is less money for what students actually want, teaching, and more to hire administrators and consultants in-house or – more often – hire private marketing firms. In short, the cost of selling the product to customers has gone up, and there is less money to actually produce it; then you need to rely on low pay to produce it with casual labour.

As for research, the major instrument to allocate funding is the Research Excellence Framework, whose goal is to rank and assess the research output of universities. My understanding of the achievements of the REF is that it has primarily created a giant time-consuming bureaucratic machine. Here’s how it works: departments are asked to select the “best” research outputs of their staff, and for that they set up reading committees who read all the publications to rank them. These rankings are then transmitted to higher levels within the university where the ranking is assessed, and decides whether it is reliable (Universities want to predict their REF score, perhaps for future budgeting). If it is not considered reliable, it is sent to external experts who can re-rank and re-assess the publications. At my university, heads of department have had to attend workshops to explain them how to tell their staff if they had been submitted for the ref or not. So what you have is thousands of people spending thousands of hours ranking and marking their colleagues’ work instead of doing more and better research, which was the first goal of the REF. And I don’t even mention the requirement of writing “impact case studies”: University College London advertised three “editorial consultant”  positions to write them. Salaries were roughly equivalent to those of a lecturer.

In all these examples, the logic is similar. You try to enforce economic freedom, competition and free markets, but you end up creating exactly what you oppose because, as Polanyi argued, self-regulating markets simply cannot exist. Margaret Thatcher is often credited for the downfall of Communism, but she may have paved the way for a system that displays disturbing similarities.

The Vicious Circle of Inequality, Debt, Crisis, and Austerity

We are in a time of austerity. Public services are being cut, social benefits are being capped, and real wages are shrinking. In the last 5 years, the UK has gone through a big wage squeeze: real wages have declined by 5.5% since 2010, on par with countries such as Greece and Portugal. All these measures have fairly clear regressive distributional effects: low-wage earners (those that are more likely to receive benefits or use public services) are being much more deeply affected than the rich, who can buy these services in the market. We are told that this is just a necessary adjustment of the labour market, and that increasing inequalities and the decline of real wages at the bottom are better than an increase in unemployment.

But what if the increase in inequality and the decline of real wages at the bottom end were not only an effect but actually a cause of the crisis in the first place? What if inequality, debt, crisis and austerity were part of a vicious circle which unfolds over decades and that is simply repeating itself? If one pieces together a number of arguments that are out there, there is a grand narrative that emerges.

1. Labour was disciplined in the 1970s. After three decades of increasing real wages in line with productivity, full employment and increases in national wealth going to labour (the Golden Age, 1945-197), unemployment increased, and Keynesianism was discredited. The “excessive” power of labour unions was commonly blamed as a major cause of the crisis, and appropriate measures to discipline labour were taken. Anti-union legislation was passed in the US (Reagan) and the UK (Thatcher), but non-accommodating monetary policies prioritizing low inflation over full employment were implemented everywhere. That was the 1970s-1980s version of current austerity, only with longer sideburns.

2. Inequalities increased, Real Wages Stagnated. Since the early 1970s, productivity continued to increase, but real wages have stagnated (The Great Moderation). Accordingly, income inequalities have increased almost everywhere, and the share of income going to labour decreased again, while profit margins for capital increased. The income share of those at the top has soared, while those at the bottom remained in the slump.

3. Debt Increased to Compensate for the Stagnation of Real Wages. There are two things that have happened to compensate for the decline of real wages from the 1970s onwards. First, there has been a massive entry of women in the workforce. Of course this has to do with cultural change, but one can also understand this as a response by households to maintain or increase household income in the face of stagnating male wages. Second, and most importantly, there has been a massive increase in private debt. Who is going to buy all the cars, houses, videogames, fridges Ipods and iPhones that are produced in ever greater numbers if real wages stagnate? Supply-side economics tells us that supply generates its own demand, but it doesn’t seem to work by itself. The solution is: you give everybody credit cards. Colin Crouch calls this privatised Keynesianism: instead of supporting consumer demand via public spending, you provide easy credit to everyone, even to poor people. “Subprime”, as in “subprime mortgages”, is another word for “poor”.  In a context of austerity where you cannot expand public spending to boost demand, an alternative is to deregulate the financial sector so that citizen-voters can still buy houses via lower credit requirements, and without direct state involvement. Everybody’s happy until…

4. …The financial system bloats and explodes. Because the whole financial system works through complex chains where risks and insurance are sold, resold, and opaquely packaged in complex products, the connection between loans, interests and actual risks is severed. When people to whom loans shouldn’t have been granted in the first place cannot pay their debts anymore, the whole pyramid collapses.

5. The Government steps in to bail out the banks, because they are “too big to fail”. What was private debt becomes all of a sudden public debt.

6. Governments face a fiscal crisis. The big hole in their national accounts due to the money they had to inject in the financial sector aggravates the problem you have in times of crisis: declining revenues because of lower growth and higher expenditures because of higher unemployment.

7. Back to square one. Governments carry out austerity to reduce debt, and they do so mainly by hitting the poor. Public services are cut, benefits are capped, wages shrink again, and labour is disciplined. Go back 6 paragraphs and start again.

A fairly similar story is provided by Pasquale Tridico here, and you can watch an excellent video by David Harvey here or another one by Mark Blyth here.