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

Austerity, Eurozone Crisis, Portugal, Uncategorized, Welfare

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.

 

 

A modest proposal to curtail the political influence of the elderly

Austerity, Modest proposal, Welfare

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.

image (3)

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.

image (2)

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.

image (1)

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.

image (4)

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.

The Economic Dilemma of UKIP

Political Science, United Kingdom, Welfare

Let us take a short trip Back to the Future. Step into The Doc’s DeLorean modified time Machine, fasten your seat belt, greet Marty McFly in the back seat, and set the destination to 2016 Britain. We accelerate to 88 miles per hour, and after a loud “bang”, it only takes a few seconds to land after the next general election. There are no flying skateboards, the weather is still miserable and the Royal Family is still reigning, but we have a new government. Just like in the last 2010 election, none of the two big parties managed to gain a majority in the Commons. Due to poor electoral strategies, Labour did not profit from David Cameron’s failures in government, and the Tories have come out of the elections once again with the biggest number of seats. However, their former allies, the Liberal Democrats, have suffered a severe electoral setback, and no longer have enough seats to secure a majority. Instead, the Tories have chosen to form a coalition with the party that made a true electoral breakthrough: Nigel Farage’s UK Independence Party. What kind of policies can we expect  from such a coalition, and would it be viable politically? Would UKIP and the Conservatives agree on issues such as welfare, pensions, taxation and social benefits?

In many ways, a Tory-UKIP coalition in the future is not completely science-fiction. UKIP – as well as a number of other Eurosceptic, anti-immigration parties throughout Europe – is  bound to make considerable advances in the upcoming elections for the European Parliament. A poll conducted in January by the Independent on Sunday revealed that UKIP was the most favourably regarded party in Britain with 27% of favourable opinions, even if voting intentions still placed Labour and the Conservatives ahead. However, UKIP seems indeed to have overtaken the Liberal Democrats as the main alternative to the big two parties: Labour was first with 35%, the Tories were at 30%, UKIP was at 19% and the Libdems at 8%[1]. While European elections are often considered as “second-order” events where voters are more likely to sanction governments and bigger parties because they are presumably less important, EP elections still showcase the strength of the different political forces that will matter for future national elections. In Britain, UKIP is a serious electoral contender, and its impact on government policies can already be felt. The government’s tougher line about immigration control, or the promise to hold an “in-out” referendum about the European Union are without doubt targeted at voters tempted by Nigel Farage’s party. Some Tory politicians have already evoked potential alliances between the Conservative Party and UKIP[2]. Hence, such a coalition cannot be ruled out in the future, even if the first-past-the-post system obviously constitutes a severe hurdle for parties outside the Labour/Conservative duopoly. In first-past the post, what matters is not only how many voters parties have, but also how they are distributed geographically, and UKIP still seems to be lacking as to this second criterion.

UKIP as a Working-Class Party

Besides institutional barriers to acces constituted by the electoral system, UKIP and the Conservatives would need to reconcile the preferences of their respective electorates. If this does not look like a huge problem when it comes to issues such as immigration control and relationships with the European Union, it would certainly be more problematic when it comes to public spending, welfare, pensions, taxes and the like. This is essentially because UKIP and Conservative voters tend to have different socio-economic profiles, different interests and different preferences.

On the one hand, recent research has shown that UKIP has the most working class electorate of all British parties[3]. For some time, many believed that the typical UKIP voter was the disgruntled anti-EU middle-class Tory in the South-East. However, it appears that the UKIP electorate is in fact similar to that of other populist radical-right parties in Western Europe: working class, “pale, male and stale”. The core electorate of UKIP is constiotuted by blue-collar workers, predominantly male, older, with low formal education levels, who feel threated by immigration and economic change, and loathe a political class composed of what they perceive – no without reason – as a bunch of posh, privately educated middle-class Oxbridge graduates. Sociologically, UKIP voters would have been the social groups which used to vote Labour in the 1960s and 1970s, but have been forgotten by New Labour in its drive to appeal to urban middle classes. This pehenomenon is by no means a British exception: in countries such as France, Belgium or Austria, the populist radical right is now the most popular party family amongst the native working class – after abstention – while left wing parties essentially source their voters in the new middles classses (teachers, public sector workers, healthcare workers and professionals). After Tony Blair’s drive to the right, managers are now as likely to vote for Labour than for the Conservatives, and the days of old Labour seem long gone.

Interestingly, the preferences of UKIP voters in terms of economic policies also tend to be more left-wing, even if they intend to vote for a party often considered on the far-right. Research on the US also shows that supporters of the Tea Party, which can be considered as the equivalent of UKIP, also often rely on federal welfare programs while supporting a party that wants to scrap them. Hence, there is often a wide gap between the preferences of the voters and the agenda of the party elites in these domains. A recent Yougov poll showed that 73% and 78% of UKIP voters supported the nationalisation of railway and energy companies respectively[4]. Corresponding figures were twice 52% for Conservative voters, and 79 and 82% for Labour voters. Hence, UKIP voters tend to be closer to Labour voters when it comes to socio-economic issues and state intervention in the economy, while Conservative voters prefer market-based solutions, a smaller state and lower taxes.

Accordingly, austerity policies and cuts in public spending pushed by the Conservative party can be thought to hurt the UKIP electoral base, as lower-educated working-class people also rely to a larger extent on public services than higher incomes who can purchase services privately. A conservative-UKIP coalition would inevitably run into this kind of dilemma, and UKIP is conscious of this. At first, its electoral manifesto promised both lower taxes for all and more spending, for instance by scrapping the bedroom tax[5], or establishing a 31% flat tax rate for all.[6]This is is feasible in opposition, but more problematic when a party accesses government and needs to fulfill its irrealistic promises.Eventually, however, UKIP ended up disowning its whole 2010 party manifesto until after the EP elections, claiming that all its policies were now “under review”.[7] It has been shown that populist right-wing parties such as UKIP are particularly prone to “blur” their positions on economic issues in order to solve these dilemmas.[8]

Betraying Voters, or Betraying other Parties?

In a forthcoming article in the European Political Science Review[9], I show that once these parties take part in government coalitions, however, blurring their position becomes more difficult, and they need to make a choice between office and votes when it comes to socio-economic policies. On the one hand, as argued above, they appeal to a large segment of working-class voters who are supportive of state intervention, and obviously those from which they benefit directly. This includes traditional social security schemes such as old-age pensions. On the other hand, in Western Europe – things are a bit different in Central and Eastern Europe –  these parties have only been able to form government coalitions with Conservative or Liberal parties who are more likely to retrench these very same welfare programmes, and who can even be rewarded electorally for cutting public spending. If populist right-wing parties choose office and want to maximise their coalition potential, they may support retrenchment measures in exchange of concessions about immigration control, but at the cost of betraying their working-class electorate and facing substantial electoral losses at the next elections when cuts in public spending bite in. If they choose votes and seek to protect their electorate from retrenchment, they jeopardise their participation in government by betraying their coalition partners, who often cooperate with them precisely in order to pass austerity measures with little opposition. For this analysis, I have carried out fieldwork in the Netherlands, Austria and Switzerland, three countries where the radical right took part in government at some point in time, and where pension reforms were put on the agenda. In all three countries, the tensions between office and votes outlined above were visible, and can serve as interesting signposts for the problems a Conservative/UKIP coalition might face.

In Austria, the Conservative ÖVP chose to form a coalition with the radical right FPÖ in 2000 as a way to curtail the left and trade unions, and push retrenchment reforms that had been impossible to carry out with the social-democrats in government. Accordingly, the FPÖ went for office and basically subscribed to the retrenchment agenda of its coalition partner in exchange of a tightening of immigration rules. While reforming welfare had proved extremely difficult in the past, this allowed for a number of swift welfare reforms to cut public spending, notably by increasing the age of retirement. The problem was that these reforms soon led to a revolt within the FPÖ, precisely because they were hurting the very electoral base of the party, which just like UKIP, was composed of blue-collar, older and male workers. A number of internal dissensions led to the creation of a splinter party, the BZÖ, and Jörg Haider, the party leader, heavily criticised its own ministers for hurting the “small people” the party was claiming to represent. In the end, the Conservatives of the ÖVP chose to drop the FPÖ and get back to form a coalition with the social-democrats, whom they considered more reliable.

In the Netherlands, Geert Wilders’s eurosceptic Party for Freedom (PVV) similarly committed to support a minority coalition formed by the Liberals and the Christian Democrats in 2010. In the run-up to the elections, Wilders had said that he would do everything he could to keep the retirement age at 65 for “Henk and Ingrid”, the typical hard-working, “squeezed middle” Dutch voters that he sought to appeal to. Accordingly he had said that the retirement age at 65 was a “breaking point” in any coalition negotiation with other parties. One day after his party obtained its best election result ever, however, Wilders said that the retirement age was “no longer a breaking point”, and agreed to support a coalition government between the Christian Democrats and Liberals determined to pursue a harsh austerity agenda, with some concessions regarding immigration and healthcare. However, unwilling to betray explicitly an election promise, the PVV systematically refused to support any attempt to increase the retirement age, forcing the government to seek support from smaller parties. Eventually, after the Netherlands entered a recession in 2012 and was forced to carry out even harsher spending cuts, Wilders pulled out of the government, arguing that he could not support austerity measures that would hurt “Henk and Ingrid”.

Finally, in Switzerland, the Swiss People’s Party (SVP) consistently pushed for retrenchment in welfare programmes as a way to fight “abusers” of social assistance taking advantage of “honest taxpayers’s money”. The SVP notably also pushed for an increase in the age of retirement  without any compensation in an alliance with the Liberals and Christian democrats against social democrats and trade unions. In this sense, the Swiss radical right diverged slightly from parties in other countries by adopting a clearly more neoliberal profile, similarly to UKIP when it doesn’t seek to “blur” or conceal its socio-economic positions. However, in Switzerland as well, the contradictions between office and votes were also visible, as its electoral base is also constituted by large working-class segments. Hence, in the referendum votes called by trade unions and the left to challenge these reforms, a majority of the electorate of the Swiss People’s Party disavowed the party elites by refusing an increase in the age of retirement. Conscious of these internal contradictions, the party subsequently contributed to torpedo another reform where its internal conflicts between a neoliberal elite and protectionist voters would come out once again, this time in the run-up to a new election. This was another strategy to blur and conceal the contradictions of its economic agenda.

In general, parties such as UKIP which build their entire electoral profile on an anti-establishment agenda have a hard time being in government, at the very core of the establishment. The interesting thing about their economic impact is that they do not emphasise economic issues as their prime area of competence, and voters do not vote for them primarily because of their economic positions. However, this is precisely what makes them expedient allies for Conservative parties, since they may be more willing to subscribe to austerity in exchange of a tightening in their domains of predilection (iimigrationa nd law and order), hoping that their own voters won’t see how austerity affects their own interests. Oftentimes, however, these calculations tend to be marked by overconfidence, and to bite them back at election time.

Another version of this paper will be published in Dialogue, the magazine of KCL’s Politics Society.


What if More Austerity Meant More Immigration?

Austerity, Migration, United Kingdom, Welfare

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?

Austerity, Corporatism, Eurozone Crisis, Welfare

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.

Untitled2

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.

L’Etat social en Suisse: progressif ou régressif?

Suisse, Welfare

EtatSocial

Pour répondre à un commentaire de Philippe Nantermod sur un billet précédent, je suis allé chercher quelques données sur les dépenses des ménages sur le site de l’Office Fédéral de la Statistique. L’argument de Philippe Nantermod est que les primes d’assurance maladie ne peuvent pas être considérées comme un impôt régressif si l’on prend en compte l’ensemble du système de santé qui est financé par l’impôt.

Le graphique suivant reprend des données de l’enquête suisse sur le budget et dépenses des ménages par classe de revenu. Selon un rapport de l’administration fédérale des contributions (page 8), un impôt est régressif lorsque son taux diminue alors que le revenu augmente. Comme la Suisse a un système de primes par tête, cet impôt est par définition régressif: les dépenses d’assurance maladie représentent 11.8% du revenu brut des ménages dont le revenu s’élève à moins de 4800 CHF/mois, alors qu’il n’est que de  3.4% pour les ménages qui gagnent plus de 13’171 CHF/mois. Le revenu brut mensuel moyen est de 9530 CHF, et l’assurance maladie représente en moyenne 5.5% (ces données ne donnent pas la médiane, qui serait un meilleure mesure).

L’argument de Philippe Nantermod est que le système de santé est en fait redistributif car la part publique du système de santé (hôpitaux, etc.) et les subsides d’assurance maladie sont financés par des impôts progressifs. Les données de cette enquête montrent en fait la très faible progressivité des prélèvement obligatoires. Jusqu’à 13’000 CHF de revenu brut par mois, la part du revenu brut payée pour les cotisations sociales obligatoires, les impôts et l’assurance maladie est en fait égale. Dans l’ensemble, la part du budget des ménages dépensé pour les prélèvements obligatoires s’lève aux environs de 25%. En fait la régressivité des primes d’assurance maladie élimine presque entiérement la progressivité de la taxation directe et des assurances sociales. Ces données ne prennent en outre pas en compte la taxation indirecte (TVA), qui est elle aussi régressive.

Why do people think that hitting the poor is the best way to cut the deficit?

United Kingdom, Welfare

Daily mail Frontpage (The Media Blog)

Last week, Ipsos Mori and King’s College London released the results of a survey showing that Britons are (almost) wrong about everything, and especially welfare. They think that for every 100£ spent on welfare, 24 are spent on fraudulent claims, whereas the actual figure looks more like 70p. They think that a 26’000£ cap on benefits would be the most effective measure to reduce the welfare bill. It would only save 290m £, whereas stopping child benefit for families with high incomes (50’000 and above) would save £1.7bn (6 times more), and raising the pension age to 66 would save £5bn (17 times more). Almost 30% of people think that more money is spent on Jobseeker’s Allowance than in pensions, where 15 times more money is spent on pensions (£4.9bn vs £74.2bn).

Why are people so wrong about welfare? You can think of a number of reasons: data illiteracy, political spin and the tabloid press. While the first is quite self-explanatory (people have trouble dealing with very big and very small numbers), the latter points raise interesting questions about the political economy of welfare reforms, and the role of the press. What is particularly interesting is that people think that hitting the poor (through a welfare cap) is more effective to reduce the deficit than distributing savings across the whole population (through an increase in the retirement age).

Politicians want us to believe that they are there to solve problems, but sometimes solving problems involves huge electoral costs. Even if increasing the retirement age would save much more money than capping benefits for low incomes, it is not exactly the measure that will win the next elections: everybody will be affected, and everybody will be against it. Hence, it may seem rational for politicians to target benefit cuts at small or marginal social groups which represent a lower electoral cost instead. If you want to save money without alienating your voters, you are much better off hitting hard a small group who doesn’t vote anyway (like jobseekers) rather than moderately cutting benefits for a large group of people who vote (like pensioners). In a country where the middle class pays for welfare but doesn’t directly benefit from it because of the high level of means testing, you are even quite likely to gain credit for finally “making work pay” even if actual savings are rather marginal. Hence, as IDS is rolling out its benefit cap, the Sun says that 74% of Britons agree with it.

Since people usually believe what politicians say, and politicians say what they think people believe, this creates a mutually reinforcing perception that hitting the poor is the best way to cut the deficit. On top of this, there are psychological effects whereby perceptions of “deservingness” mediate perceptions of costs. There has been some research showing that there are fairly consistent perceptions of deservingness of welfare recipients across citizens of European countries. Elderly people are universally seen as the most deserving, followed by sick and disabled people. Unemployed people, by contrast, are seen as the least deserving. People may think that cutting benefits for “deserving” retired recipients (which will include themselves at some point) saves less money than cutting benefits for “undeserving recipients”. Normative perceptions determine cognitive perceptions.

Finally, there is the role of the press. There is an article in the last issue of the Journal of European Social Policy about the depiction of welfare recipients in the press in the UK, Denmark and Sweden. It shows that the British press is much more negative about welfare recipients than its counterparts in Continental Europe. It is more likely to report abuse, fraud and antisocial behaviour. It also frequently depicts “single mothers abusing the welfare system” or who “have made a living out of producing children to be supported by the welfare state” (the Philpott case was probably the most prominent recently). Interestingly, survey respondents often consider this kind of behaviour in their estimation of the size of benefit fraud, while it is not illegal.

This more negative view of welfare is probably influenced by the general political context, but also by the internal logic of the media field, which favours anecdotes, vivid stories and personalisation rather than abstract concepts and complex causes. A man with two wives and 11 children is more spectacular than falling consumer demand. But it may also have something to do with the social background of journalists and media bosses themselves, specifically in the right-wing press. What is striking about newspapers like the Sun or the Daily Mail is the abysmal gap between their target readership (the older, hard-working “squeezed” middle class that feels threatened by immigration and socio-economic change) and the living standards of its bosses. The Guardian reports that Paul Dacre, the editor of the Daily Mail, which has made its speciality of reports on “welfare abuse”, earned 1.8m £ last year, including 26’000 (the same amount as the welfare cap) in fuel allowances and other corporate social benefits (medical plans). He has a 14.8m pension pot, and got an inflation-busting 5% pay increase last year. Obviously, somebody with that kind of living standard has a very accurate idea of life on welfare.

Why is Portugal lagging behind all other European countries in educational attainment?

Welfare
years3

Average Years of Total Schooling in 27 countries, 1950-2010, Population 25 and over (Source: Barro and Lee)

I don’t have the answer. I have just been playing with Barro and Lee’s dataset on education attainment. As the name indicates, it covers education attainment in 146 countries between 1950 and 2010 for different age groups. The two charts above show the average years of schooling of the population 25 and over since 1950 in 27 countries. I know that the first graph  is difficult to read, but the point is to show Portugal’s outlier status in comparison with all other European countries. With 7.73 years of schooling on average, the Portuguese workforce was the least qualified in the EU in 2010; the average for the countries showed in the graph is 10.62. Portugal started below everybody else in 1950 (compulsory schooling under Salazar was 4 years, and many were simply not enrolled) but I cannot really understand why it is still lagging behind Spain, which started from a similar position, namely a long fascist dictatorship keen on maintaining a docile and uneducated populace.

chart6

The three graphs below show the population (25 and over) between 1950 and 2010 in Portugal, Spain, and Sweden (as a point of comparison for “advanced” countries) by highest degree attained (but not necessarily completed). Even if a higher proportion of the Spanish population had no schooling at all in 1950, this share has been reduced dramatically while it has remained at high levels in Portugal. According to the data, 11.5% of the Portuguese population had no schooling at all in 2010, and 46% had gone through primary schooling only. The corresponding numbers are 1.6 and 25% in Spain, and 1.6 and 11% in Sweden. This happens in spite of the fact that Portugal has a fairly low student-teacher ratio and has invested massively in education over the past few decades. However, as the number of PhDs has exploded, the problem of low skills at the bottom is still huge. As we know, low productivity is a big problem in Southern Europe, and this is probably strongly related to low education levels. Cuts in spending certainly won’t help to solve this problem.

sweden557

La Suisse est le pays d’Europe qui redistribue le moins

Welfare
Image

Inégalités de revenu avant et après impôts et transferts

AvenirSuisse a publié aujourd’hui une étude sur les inégalités en Suisse, pour contrer l’initiative 1:12. Ils affirment que les inégalités salariales en Suisse sont les plus basses de l’OCDE. D’après les données du Luxemburg Income Study 2005 (le graphe est basé sur les données de Lane Kenworthy, University of Arizona), c’est le cas seulement avant impôts et transferts. Les données datent en peu, mais on ne peut pas s’attendre à des changements fondamentaux. Après impôts et transferts, la Suisse est dans la moyenne en termes d’inégalités de revenu. Ce qui est particulièrement intéressant, c’est que la Suisse est le pays européen qui redistribue le moins, notamment en raison de beaucoup d’éléments régressifs, comme les primes d’assurance maladie. Seuls les Etats-Unis et le Canada redistribuent moins.

MISE A JOUR: J’ai trouvé des données plus récentes dans le récent rapport de l’OCDE sur les inégalités. Les résultats (basés sur ces données) sont similaires. Après impôts et transferts, la Suisse n’est pas plus égalitaire que les pays nordiques, contrairement à ce qui est sous-entendu ici.

oecd2

 

Portugal’s Political Crisis, or the Ordeal of Junior Coalition Partners

Austerity, Eurozone Crisis, Welfare

On Monday, the Portuguese Finance Minister Vitor Gaspar resigned. Gaspar was the main architect of  Portugal’s austerity drive since its bailout two years ago. His political charisma was akin to a flat bike tyre, but he was considered a major guarantee of credibility for the Troika and Portugal’s creditors. Apparently, he had already asked to resign last year after the constitutional court invalidated a number of the austerity measures contained in his budget for 2013. However, his resignation was then denied by the Prime Minister Pedro Passos Coelho.

Yesterday, the Minister for Foreign Affairs and leader of the minority coalition partner CDS-PP, Paulo Portas also asked to resign to protest against the nomination of Gaspar’s replacement, Maria Luis Albuquerque. Earlier this year, he had already expressed his disagreement with some of the austerity measures carried out by his own government, notably an increase in the taxation of pensions. This would badly hurt his traditional electorate of pensioners, but he acquiesced because it was a condition imposed by the Troika.  Since he is the leader of the minority coalition partner, it would have been difficult to imagine his party staying in the coalition, and early elections were probably the most likely outcome. However, once again, Pedro Passos Coelho refused Portas’s resignation, saying it was premature. Passos Coelho said he wouldn’t resign either despite the unpopularity of his government. We don’t really know what’s going to happen now. Passos Coelho said he would talk to the CDS-PP to maintain a majority, but all its ministers seem to have their resignation letter ready. Nobody knows what’s happening next, but Portuguese bond yields have soared, making another bailout quite likely.

There are two conclusions that can be drawn from this.

First, excessive employment protection may indeed really be a problem in these PIGS countries. Two ministers want to quit (perhaps to do something more productive, like pet food taster or nude cruise worker), and they simply won’t let them. However, this may only apply to ministers, because liberalising the labour market doesn’t seem to improve things for everybody else.

Second, this shows the dilemma of small parties like the CDS-PP when they coalesce with conservative parties that implement austerity. Even if there is no real populist radical right party  (PRRPs) in Portugal, the electorate of the CDS-PP is pretty similar to that of PRRPs elsewhere in Europe: pensioners, farmers and other groups that often depend on government transfers. These parties have electorates that are attached to the welfare state, but they can only coalesce with right-wing parties that are likely to retrench it. As a consequence, they take the blame for policies that they don’t really want in the first place. Something very similar happened with the Austrian FPÖ when they were in a coalition with the conservative ÖVP between 1999 and 2006. They supported a number of retrenchment policies which hurt their own electorate, and the party collapsed in 2002, giving birth to a splinter group, the BZÖ. More recently, in the Netherlands, Geert Wilders’s PVV agreed to support the first (minority) right-wing cabinet of Mark Rutte (VVD) without formally taking part in government. The government engaged  in harsh austerity measures in the aftermath of the financial crisis, and Wilders eventually withdrew his support because of disagreements about the size of austerity measures, notably about pensions, causing the cabinet to fall. In the following elections, the PVV lost a third of its votes. Similarly, even if their electorate is different, the electoral prospects of the Liberal Democrats in the United Kingdom look fairly grim after they had to betray a number of their electoral promises, notably not to raise tuition fees. For these parties, it seems really difficult to hold office and keep voters at the same time.