Oxford Review of Economic Policy - recent issues

Introduction

2009-05-20

Factor shares: the principal problem of political economy?

Atkinson, A. B. — 2009-05-20

This paper identifies three reasons for studying factor shares: to make a link between incomes at the macroeconomic level (national accounts) and incomes at the level of the household; to help understand inequality in the personal distribution of income; and to address the concern of social justice with the fairness of different sources of income. In each case, I explore the implications and point to ways in which the analysis could be taken forward in a twenty-first-century treatment of the classical problem of political economy.

Structural reforms in Europe and the (in)coherence of institutions

Amable, B. — 2009-05-20

The aim of this paper is to analyse the consequences of some structural reforms on the institutional coherence of OECD countries, particularly in Continental Europe, and on their economic performance, particularly as regards employment. Because institutions in developed political economies are interrelated through a complex network of complementarities, institutional change has consequences beyond the area concerned in a reform. This also implies that there are complementarity effects in reforms themselves. A challenge of reform programmes is therefore to achieve a new type of complementarity between reformed institutions. The paper presents empirical evidence questioning the compatibility of the ongoing structural reforms in product and labour markets with the existing institutional structures in some OECD countries. The coherence of the flexicurity strategy, i.e. a combination of labour-market flexibility and a generous welfare state, is also questioned, from the point of view of both economic efficiency and political economy.

Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries

Bassanini, A., Duval, R. — 2009-05-20

There is no or limited consensus on the quantitative impact of institutions on unemployment, which has led some to question the case for structural reforms. Recent studies suggest also that institutions interact with each other and cannot be analysed in isolation. In this paper, we estimate a standard reduced-form model to explore the institutional determinants of unemployment and assess its robustness using a large battery of robustness checks. We show that, although the impact of each individual policy varies across countries owing to policy interactions, the simple linear model can be used to draw inferences for countries with an average mix of institutions. The model is then extended to encompass systemic interactions, in which individual policies interact with the overall institutional framework. We find relatively robust evidence of broad reform complementarities.

Unemployment compensation and high European unemployment: a reassessment with new benefit indicators

Howell, D. R., Rehm, M. — 2009-05-20

Generous unemployment benefits lie at the heart of the conventional explanation for persistent high unemployment. The effects of benefit generosity on work incentives are more ambiguous in a broader behavioural framework in which workers get substantial disutility from unemployment (given income) and know that unemployment has scarring effects in the future. The micro evidence suggests modest effects of changes in generosity, but there are reasons to doubt that the impacts on national unemployment rates are consequential. The empirical case for the orthodox prediction comes from cross-country regressions on the OECD's gross replacement rate (GRR), but the published evidence is mixed, and we find little support in the pattern of annual changes in the GRR and the unemployment rate for OECD countries over the last three decades. We take advantage of new and much improved net replacement indicators from the OECD, which show little correlation with either the GRRs or with unemployment and employment rates. We conclude that the available evidence does not offer compelling support for the conventional view.

Monetary policy and European unemployment

Schettkat, R., Sun, R. — 2009-05-20

In the long history of rising and persistent unemployment in Europe, almost all welfare-state institutions—employment protection legislation, unions, wages, wage structure, unemployment insurance, etc.—have been alleged to have caused and found guilty of causing this tragic development at some point in time. Later, welfare-state institutions in interaction with external shocks were identified as more plausible causes of rising equilibrium unemployment in Europe. Monetary policy has managed to be regarded as innocent. Based on the assertion of the neutrality of money in the medium and long run, the search for causes of European unemployment has shied away from the policy of central banks. But actually the institutional set-up regarding monetary policy is very different between the Federal Reserve System (Fed) and the Bundesbank and its successor, The European Central Bank (ECB). We argue that the interaction of adverse shocks and tight monetary policies may have been the major—although probably not the only—cause of unemployment in Europe remaining at ever higher levels after each recession. We identify the monetary policy of the Bundesbank as asymmetrical, in the sense that the Bank did not actively fight against recessions, but it dampened recovery periods. Less constraint on growth would have kept German unemployment at lower levels.

The Swedish unemployment experience

Holmlund, B. — 2009-05-20

By international standards, unemployment in Sweden remained remarkably low throughout the 1970s and the 1980s. In the early 1990s, however, the unemployment rate increased sharply and hit double-digit levels. The paper argues that the steep rise in unemployment was mainly the result of a series of adverse macroeconomic shocks, partly self-inflicted by bad policies, and partly caused by unfavourable international developments. The extremely contractionary monetary policy in 1992 appears to have had strong and long-lasting effects on unemployment. Institutional factors do not appear as convincing explanations of the steep rise in unemployment in the early 1990s.

Capitalist economies and wage inequality

Salverda, W., Mayhew, K. — 2009-05-20

This article presents new stylized facts on the incidence of low pay and mobility out of low pay for 13 European countries and the USA. Women, the young, the less skilled, and part-timers are generally most at risk, as are those who work in retail, hotels, catering, and personal services. However, the relative importance of these characteristics can vary from country to country. The incidence of low pay varies considerably across countries, as does its trend. No direct link is found to aggregate employment or to the employment rate of the less skilled. Nor does the industrial structure of employment have much effect. However, differences between the low-wage production of goods and of services are important. ‘Inclusive’ labour relations are central in containing the incidence of low-pay. By inclusiveness is meant the existence of mechanisms, formal or informal, to extend terms and conditions negotiated by workers with strong bargaining power to workers with less bargaining power. In some countries a national minimum wage is an essential accompaniment. The article considers the extent to which countries can maintain the more benign institutions that limit low pay.

Must equality and efficiency conflict? The economics of Andrew Glyn

White, S. — 2009-05-20

This paper aims to provide an introductory overview of Andrew Glyn's economics. Throughout his intellectual career, Glyn's central concern was to understand how economic efficiency can be made consistent with egalitarian objectives. In pursuing this concern, his work engaged critically with developments in contemporary capitalism and with different proposals for promoting egalitarian objectives, including revolutionary socialism, social democratic corporatism, and basic income capitalism. Glyn's legacy is a set of works which provide great insight into the development of capitalism and on the limits and possibilities of egalitarian advance.

The writings of Andrew Glyn (1943-2007)

2009-05-20

Business taxation in a globalized world

Devereux, M. P. — 2009-01-14

This paper addresses broad issues concerning taxes on company profit in a globalized world in which companies, capital, and profit can move easily between countries. It considers reasons for national taxation of company profit in such a world, and reviews the development of such taxes in the OECD. The role played by tax havens is discussed and evidence on the responsiveness of companies to differences in taxation across countries is presented. A central issue is the allocation of taxable profit between countries. Existing practice has no clear rationale. Recent proposals for fundamental reform in the EU are discussed.

Corporate taxation in the OECD in a wider context

Loretz, S. — 2009-01-14

Against the background of increased globalization statutory corporate tax rates have shown a clear downward trend over the last two decades. The sharp decline in these rates was accompanied by substantial tax base broadening and a comparable reduction in personal income tax rates only until the early 1990s. This suggests that corporate tax competition is of increasing importance. So far corporate tax revenues remain fairly stable. But an analysis of corporate taxation in the context of the overall tax systems shows that a substantial shift towards value-added taxes has taken place. While the trends so far have been driven by smaller European countries, recent tax reforms indicate that increasing tax competition is inducing a shift towards consumption taxes even for larger economies.

What problems and opportunities are created by tax havens?

Dharmapala, D. — 2009-01-14

Tax havens have attracted increasing attention from policy-makers in recent years. This paper provides an overview of a growing body of research that analyses the consequences and determinants of the existence of tax-haven countries. For instance, recent evidence suggests that tax havens tend to have stronger governance institutions than comparable non-haven countries. Most importantly, tax havens provide opportunities for tax planning by multinational corporations. It is often argued that tax havens erode the tax base of high-tax countries by attracting such corporate activity. However, while tax havens host a disproportionate fraction of the world's foreign direct investment (FDI), their existence need not make high-tax countries worse off. It is possible that, under certain conditions, the existence of tax havens can enhance efficiency and even mitigate tax competition. Indeed, corporate tax revenues in major capital-exporting countries have exhibited robust growth, despite substantial FDI flows to tax havens.

Corporate tax elasticities: a reader's guide to empirical findings

Mooij, R. A. d., Ederveen, S. — 2009-01-14

Corporate taxes exert a variety of effects on business behaviour. A wealth of empirical evidence assesses the magnitude of these behavioural margins of taxation. This article offers an up-to-date review and aims to provide common ground by computing for each distortion the semi-elasticity of the corporate tax base. We pay particular attention to international investment where it is not a priori clear whether marginal investment decisions or discrete locations are more important. Using an extension of the meta analysis of De Mooij and Ederveen (2003), we explore the extent to which existing studies reveal differences in effect size between the intensive and extensive margins of international investment.

Taxation of outbound direct investment: economic principles and tax policy considerations

Devereux, M. P. — 2009-01-14

This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for traditional systems based on the residence of the investor or the source of the income, nothing less than full harmonization across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. However, source-based taxation requires an allocation of the profits of multinational companies to individual jurisdictions; this is not only very difficult in practice, but in some cases is without any conceptual foundation. The taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country.

The European Commission's proposal for a common consolidated corporate tax base

Fuest, C. — 2009-01-14

The European Commission is currently preparing a proposal for a directive on the introduction of a common consolidated corporate tax base (CCCTB). This paper reviews the current state of the European Commission's preparation of the CCCTB proposal and discusses the implications for efficiency and fairness of the tax system. The analysis concludes that more evidence of significant economic benefits from introducing a CCCTB would be required to generate widespread support for the project.

Economic research and labour immigration policy

Ruhs, M. — 2009-02-05

The design of labour immigration policy requires nation states to make fundamental decisions on how to regulate: (i) the number of migrants to be admitted; (ii) the selection of migrants; and, (iii) the rights of migrants after admission. In practice, the debate over these three elements of immigration policy involves a wide range of economic, social, legal, moral, and political considerations. Recognizing the inherent inter-disciplinarity of the subject, this paper focuses on the implications of economic theories and research for regulating the number, selection, and rights of migrant workers in high-income countries. It examines the asymmetric economic interests of migrant-receiving and migrant-sending countries in the debate over the ‘optimal’ design of labour immigration policy and, in light of this analysis, provides a brief economic assessment of the core components of labour immigration policy in the UK.

Scale, diversity, and determinants of labour migration in Europe

Zaiceva, A., Zimmermann, K. F. — 2009-02-05

While global migration is increasing, internal EU migration flows have only increased slowly. This paper contributes to a better understanding of the determinants and scale of European migration. It surveys previous historical experiences and empirical findings including the recent Eastern enlargements. The determinants of migration before and after the 2004 enlargement and in the EU15 and EU10 countries are analysed using individual data on migration intentions. In addition, perceptions about the size of migration after the enlargement are studied. The potential emigrant from both old and new EU member states tends to be young, better educated and to live in larger cities. People from the EU10 with children are less likely to move after enlargement in comparison to those without family. There exists a correlation between individual perceptions about the scale of migration and actual flows. Better-educated and left-oriented individuals in the EU15 are less likely to perceive these flows as important.

The demographic effects of international migration in Europe

Coleman, D. — 2009-02-05

International migration is now the dominant factor determining the size, rate of change, and composition of most European countries. Migration is driving quite rapid population growth in some north-western countries, slowing or arresting decline in the South, accelerating decline in the East. Migration is difficult to analyse: the process is complex, the data poor, and the theory unsatisfactory. Its many factors include unpredictable policy change. But some conclusions can be reached. While immigration usually reduces the average age of the recipient populations, it cannot ‘solve’ population ageing except through very high and exponentially increasing inflows. Already it is changing the face of European countries. According to available projections, the proportion of the population of foreign origin in some European countries will increase from 5–15 per cent of the total today, to 15–30 per cent by mid-century. Such projections depend primarily on the assumptions about the level of international migration.

The labour market impact of immigration

Dustmann, C., Glitz, A., Frattini, T. — 2009-02-05

In the first part of this paper, we present a stylized model of the labour market impact of immigration. We then discuss mechanisms through which an economy can adjust to immigration: changes in factor prices, output mix, and production technology. In the second part, we explain the problems of empirically estimating how immigration affects labour market outcomes of the resident population and review some strategies to address these. We then summarize some recent empirical studies for the UK and other countries. We conclude with an outlook on what we believe are important avenues for future research.

The labour-market performance of recent migrants

Clark, K., Drinkwater, S. — 2009-02-05

Migrant workers constitute a vital component of many Western labour markets. Although migrants can benefit greatly by moving to higher-wage economies, it is important to compare their labour-market outcomes with those of native-born workers. In this paper, we discuss factors that have been found to influence labour-market success in the receiving country and examine the actual performance of recent migrants to the UK. The UK provides a good case study for conducting such an exercise because of the very large increases in immigration that have been seen over the past decade. We find that labour-market performance varies greatly between migrant groups and that outcomes have changed noticeably following the UK government's decision to allow migrants from Poland and other Central and Eastern European countries more or less free access to the labour market after EU enlargement in 2004.

Labour-market assimilation of foreign workers in Italy

Venturini, A., Villosio, C. — 2009-02-05

This is the first paper to analyse the labour-market assimilation of foreign (i.e. non-citizen) workers in Italy. It considers the daily wages and the days of employment of male workers in WHIP, a matched employer–employee panel dataset, from 1990 to 2003. The traditional human-capital approach is augmented by a control for the probability of staying abroad, modelled by aggregate variables of the origin country. The human-capital variables considered are age and experience, both in and out of employment. What emerges from the empirical analysis is discouraging. Foreigners who are able to get higher wages are the least likely to stay, but assimilation profiles do not change when return migration is taken into account. Foreigners employed in the private sector earn the same wages as natives upon entry into employment, but the two wage profiles diverge with on-the-job experience. Neither do foreigners assimilate from an employment perspective: a differential in employment between foreign and native workers is found even upon entry, which increases over time. In the construction sector the wage and employment differential is even larger, while manufacturing and services follow the aggregate trend. Africans immigrants have the fewest career prospects while Eastern European and Asian workers are less far behind. The general pattern for foreign workers appears to be a fragmented career, either restricted to seasonal or temporary jobs or alternating between legal and illegal employment.

Immigrants and welfare programmes: exploring the interactions between immigrant characteristics, immigrant welfare dependence, and welfare policy

Barrett, A., McCarthy, Y. — 2009-02-05

The primary purpose of this paper is to provide a review of the papers within the economics literature that have examined the questions of immigrant welfare use and the responsiveness of immigrants to the incentives created by welfare systems. While our focus is largely on papers looking at the European case, we also draw on studies from the United States, in particular on issues where the European literature is thin. One set of papers asks whether immigrants who are more likely to use welfare are attracted to more generous welfare states. The results from these papers are not clear-cut. Another set of papers asks if immigrants use welfare more intensively than natives and if they assimilate out of or into welfare participation. In most cases, the unadjusted data show higher use of welfare by immigrants, although for some countries, for example Germany, this can be explained by differences in immigrants’ characteristics. Yet another set of papers finds that the rate of welfare use by existing migrants can influence the welfare use of newly arrived co-nationals. We illustrate some of these issues by looking at immigrant welfare use in Ireland and the UK. Immigrants in the UK appear to use welfare more intensively than natives, but the opposite appears to be the case in Ireland.

The fiscal impact of immigration on the advanced economies

Rowthorn, R. — 2009-02-05

This paper is concerned with the advanced economies. It begins with a discussion of the demographic issues that have played such a large role in the debate on immigration. This is followed by a section on the main problems involved in estimating the fiscal impact of immigration and then a summary of the international evidence on this topic, mostly from Europe and America. Separate sections on the UK and on low-fertility countries follow. The main conclusions are as follows. Highly skilled migrants normally make a large fiscal contribution, whereas unskilled migrants are likely to impose a net cost on native taxpayers if they settle in the receiving country. However, even unskilled migrants may be net contributors if they eventually depart and make few claims on government expenditure while in the country. Most empirical studies find that the fiscal contribution of the immigrant population as a whole is quite small. The positive contribution of some migrants is largely or wholly offset by the negative contribution of others. This finding holds across a variety of countries and methodologies. Estimates of the net fiscal contribution of immigration normally lie within the range ±1 per cent of GDP. There are a few exceptions, but these refer to countries experiencing demographic collapse and they are based on unrealistic assumptions about the inter-generational allocation of future taxes and government expenditure. With more realistic assumptions, the overall fiscal benefit of immigration is quite small, even in these countries. These findings suggest that, in general, there is no strong fiscal case for or against sustained large-scale immigration. The desirability or otherwise of large-scale immigration should be decided on other grounds.

The determinants of migrant remittances

Carling, J. — 2009-02-05

This article explores the factors that account for variation in remittance flows. Why do some immigrants send much more money to their country of origin than others? This is a question that, in the aggregate, has implications for national economies and migration-related policy. The analysis departs from the classic studies of remittances and considers how the context of contemporary migration in Europe is likely to affect remittance patterns. Possible influences on remittance-sending are disaggregated into nine domains, and each is discussed with reference to theoretical arguments and empirical findings. The temporal aspects of remittance-sending are discussed separately. The final section of the article considers implications of the micro-level analysis for aggregate remittance flows and policy. It is argued that the focus on altruism versus self-interest in the literature has partly diverted attention from explaining the actual variation that is important in a policy perspective.

Demographic and labour-market impacts of migration on Poland

Kaczmarczyk, P., Okolski, M. — 2009-02-05

Post-2004 labour migration from Poland turned out to be one of the most spectacular migratory movements in contemporary European history. This outflow on a massive scale is surmised to impact on demographic, economic, and social phenomena both in Poland and in the receiving countries. The aim of this paper is to assess the demographic and labour-market impacts of the recent migration of Poles. We argue that selectivity patterns in the post-accession period differ significantly from those noted in the pre-accession phase. Recently, a stronger propensity to migrate is observed among young and relatively well-educated people who, at the same time, originate from economically backward areas characterized by limited employment opportunities. This observation is consistent with our assessment of the labour-market impacts of recent migration from Poland. From the analyses presented it follows that the short- and medium-term impacts of migration on the Polish labour market are moderate. However, as we argue, recent outflow might contribute significantly to a crowding-out of the economy in the long term.