Electoral systems and immigration

Unexplored stylized facts on OECD countries suggest that plurality electoral systems are associated with higher openness to immigration. We propose an explanation based on a retrospective voting model where immigration hurts voters but benefits a rent-seeking policymaker who appropriates part of the income generated by immigrants. To be reappointed, the policymaker must distribute the compensation. With respect to proportional systems, plurality systems make it possible to compensate only a few decisive districts and leave after-compensation rents higher, therefore producing higher immigration. In our model, non-decisive districts receive no compensation at all under both electoral systems, providing a rationale for widespread anti-immigration attitudes. Notably, our results also help to explain why governments often seem more pro-immigration than do voters. Finally, our model predicts that opposition to immigration is more geographically dispersed in plurality systems. Basic evidence supports this prediction.     

Long-term unemployment and short-term unemployment benefits: The changing nature of non-employment subsidies in Central and Eastern Europe

Non-employment rates in all central and eastern European countries have increased dranatically thoroughout the transition and are currently larger than those of the lowest income OECD countries. Non-employment benefits other than unemployment benefits are providing income support to this growing number of able-bodied individuals out of work. Under the present design of unemployment benefits and social assistance, there may be serious incentive problems related to the shift from unemployment benefits to other, means-tested, non-employment benefits and this shift occurs in transition countries at rather early stages of an unemployment spell; these incentive problems are bound to become particularly acute in a less inflationary environment.     

Electoral accountability and tax mimicking: the effects of electoral margins, coalition government, and ideology

This paper investigates the relation between tax mimicking and electoral accountability against the background of data on Spain. The results confirm the presence of tax-mimicking behaviour and indicate a relation between tax mimicking and electoral accountability. Tax rates are found to be higher and the reaction to neighbours' tax rates lower when the electoral margin is high and when left-wing parties control government. Coalition governments do not tax heavily and mimic more than single party majority governments.     

The effects of elections on macroprudential policy

We provide evidence for a specific challenge in the design of macroprudential policy, namely political interference. Using panel data from 80 countries over the period of 1990–2016, we uncover the electoral cycles in macroprudential policy. We show that a loosening in macroprudential policy becomes more likely in the pre-election year, especially in countries with lower institutional quality. There is no evidence for the reversal of such actions in the post-election year. We also find that capital account openness, the history of macroprudential policy actions and inflation matter in determining the strength of electoral cycles in macroprudential policy, in addition to institutional quality. The electoral cycles are found to be stronger in countries that are financially less open, that relied less on macroprudential policy in the past, and that have lower inflation.     

Constitutions and the resource curse

Utilizing the fact that natural resources are randomly distributed among countries, we investigate how public income shocks have different long run economic effects dependent on constitutional arrangements. We find that (i) the so-called ‘resource curse’ is present in democratic presidential countries—but not in democratic parliamentary countries, (ii) being parliamentary or presidential matters more for the growth effects of natural resources than being democratic or autocratic, and (iii) natural resources are more likely to reduce growth when proportional electoral systems are in place than when the electoral systems are majoritarian. The two first effects appear very robust, the last effect less so.     

The impact of unemployment on inequality and poverty in OECD countries

The purpose of this research is to examine the contribution of unemployment to income inequality and poverty in various OECD countries. These relationships have been explored using Luxembourg Income Study micro-data. Considerable differences across OECD countries are revealed through the use of within-household unemployment distributions. These differences help to explain most of the observed divergences in the relationship between unemployment and income distribution, in conjunction with the heterogeneous influence of social benefits on the economic position of the unemployed in these countries. A sub-group decomposition analysis corroborates the limited effect of unemployment on income distribution in most of the considered countries. However, it seems clear that the unemployed are among those with the highest risk of experiencing poverty.
JEL classification: D31, I32, J31.     

Constitutions and the resource curse

Utilizing the fact that natural resources are randomly distributed among countries, we investigate how public income shocks have different long run economic effects dependent on constitutional arrangements. We find that (i) the so-called ‘resource curse’ is present in democratic presidential countries—but not in democratic parliamentary countries, (ii) being parliamentary or presidential matters more for the growth effects of natural resources than being democratic or autocratic, and (iii) natural resources are more likely to reduce growth when proportional electoral systems are in place than when the electoral systems are majoritarian. The two first effects appear very robust, the last effect less so.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

A comparison of unemployment, income and mortality interaction for five European countries

The relationship between unemployment and health status is examined in a comparative study of five European countries using a time series model. "The hypothesis considered in this paper is that the secular decline in mortality rates can be attributed to the secular rise in real per capita income and that the remaining fluctuations in mortality rates can be explained by cyclical movements in income and variations in unemployment." The data concern the Federal Republic of Germany, France, Italy, Sweden, and Ireland.     

Transition from unemployment benefits to social assistance in seven European OECD countries

The topic of this paper is the transition from unemployment benefit schemes to social assistance in seven European OECD countries. The unemployment benefit schemes are formally quite different in the seven countries. Most are mandatory but Denmark and Sweden have voluntary unemployment insurance and Finland has a mandatory basic scheme with a voluntary income related component on top of that. Self employed people can join the U.B. schemes in the 3 Scandinavian countries. All the U.B. schemes have working or contribution conditions to be met by the members in order to obtain eligibility for benefits. These conditions are relatively tight in the Netherlands, France and Sweden and relatively easy in Denmark and Great Britain with Germany and Finland in between (based on rules in 1994–95). Recent developments in several countries have been to tighten the access conditions to the U.B. schemes and from 1997 Denmark will be ‘on line’ with Germany. The Netherlands have tightened the access criteria very significantly in 1995. There is a considerable variation as far as the duration of the unemployment benefit period is concerned. Sweden has a benefit period in fact without effective time limitations. The Danish benefit period is also very long, 7 years now being reduced to 5 years. 5 years is also the maximum duration in the Netherlands and in France, but only after many years of work and after a relatively high age has been reached. The maximum period in Germany, 22/3 years, also requires a long work history and a relatively high age. Finland and Great Britain have uniform benefit period (just as in Denmark and Sweden), in Finland it is appr. 2 years (longer for elderly unemployed just as in Sweden and Denmark) and in Great Britain it was 1 year but from October 1996 it was reduced to 1/2 year. The differences in the duration of the benefit periods between the seven countries are very considerable. As already mentioned, there has been a tendency to reduce the benefit period in several countries. Such a change is also being considered for the ‘never ending’ benefit period in the Swedish U.B. scheme. The benefit formula is purely flat rate in Great Britain and income related in the other countries. There is a maximum benefit level in 5 of these countries, but not in Finland, where the compensation is stepwise decreasing with increasing income. In the 5 countries with income related benefits and a maximum benefit level, this maximum level is reached at a relatively low income in Denmark (2/3 APW income) and Sweden (close to APW income) and at a relatively high income in the Netherlands (appr. 1.5 APW income) and Germany (appr. 1.7 APW income) and at a very high income level in France. France is the only country among the 7, where the benefits after an initial period are being reduced regularly (every 4 months) in the benefit period down to a minimum level. Sweden and Germany have reduced the benefit levels in recent years. Denmark has the highest gross compensation percentage, 90, in relation to lost income, but it is only effective over a relatively narrow income interval, from approx. 133,000 DKK to 162,000 DKK (1996), ‘between’ the min. and max. U.B. rates. According to the 3 institutional criteria applied here, access to the schemes, duration of the benefit period and the type of benefit formula, the U.B. schemes of the seven countries studied are very different. The exit scheme from U.B is social assistance in most of the countries, but not in Germany, where it is possible to continue in a scheme with lower compensation but still income related. For Sweden it is hardly meaningful to speak of an ‘exit scheme’ when the U.B. insurance is without effective time limitations. The exit schemes in the other countries are all characterized by having flat rate benefits. All the exit schemes are means tested and this is a crucial difference to the U.B. schemes, and they are without time limitations. Means testing and no effective time limitations are usual characteristics for social assistance and social assistance like schemes. In all the countries, except in Denmark and Sweden, there is ‘topping-up’ from social assistance to a guaranteed minimum level disregarding the income sources. In the two Scandinavian countries mentioned, a ‘social event’, i.e. illness or unemployment, is required in order to be eligible for social assistance benefits. Net replacement rates are used to illustrate the levels of compensation within the U.B. and the S.A. schemes, to identify possible incentives problems, and to illustrate the economic implications of the transition from U.B. to S.A. schemes. The net replacement rates presented are calculated by using the ‘disposable income after net housing costs’ income concept. The calculations include several family types, singles and couples with and without children and for the couples with one or two incomes. A general result but with some modifications, cf. the following, could be that the U.B. based replacement rates usually are higher than the S.A. based, but that the difference is minor when the U.B. scheme is flat rate or income related with a maximum benefit level being reached at a relatively low income, for Great Britain there are in several cases no difference at all. The ‘topping-up’ has the implication that the U.B. and S.A. based replacement rates are often identical at the lower end of the income scale. The very high S.A. based replacement rates (well over 100 per cent) often seen for Denmark and Sweden at low income levels do not necessarily imply, that social assistance in those two countries is more generous than in the other countries, it is very much an effect of not having more or less automatic ‘topping-up’ to a guaranteed minimum income level when earned income is low. The single parent family type seems to have incentives problems at relatively low income levels in most of the countries, especially when receiving U.B., she may temporarily be caught in the ‘unemployment trap’. The one earner couple with children may also be exposed to the ‘unemployment trap’ but on a more permanent basis. The S.A. based replacement rates for this family type are extraordinarily high (and higher than the U.B. based) in Denmark and Sweden, where this family type, however, is very rare. For the two earner family (where one of the spouses always has earned income) the means testing of S.A. makes an impact on the S.A. based net replacement rates, they are in most cases substantially lower than the U.B. based. The results of the net replacement calculations indicate no or only minor economic implications by a transition from U.B. to S.A. in the lower end of the income scale while the effect in most cases will be more substantial in the higher end of the income scale. This is not always the case in Sweden and Denmark where S.A. for some family types are preferable to U.B. and where the difference in other cases may be so small, that it implies incentives problems for joining the voluntary U.B. scheme. The calculation of ‘long term’ (5 years) net replacement rates for families at a low income level (the point in the income distribution where only 5 per cent have lower income) and only including one earner families, reveals that either the long benefit period in the U.B. scheme (Sweden and Denmark) or ‘topping-up’ (Germany, the Netherlands and Great Britain) generate ‘constant’ net replacement rates, and quite high ones, at low income levels. Only in France and to some extent in Finland will there be a decrease in net replacement rates over time. Most of the differences concerning the duration of unemployment benefit periods and to some extend the benefit formulas have no effect on the long term net replacement rates. At higher income levels the time limitations in the U.B. schemes will be visible again, except in Great Britain where the U.B. and S.A. benefits are almost identical. It is not possible to point out a ‘worst’ country with respect to ‘incentives’ problems, but the Danish, and to some degree also the Swedish, U.B. schemes with their high net replacement rates at lower income levels and long duration periods ‘stand’ out in many cases, and the S.A. schemes in those two countries may also contribute to permanent ‘unemployment traps’ as well as lack of incentives to join the voluntary insurance schemes. The two Scandinavian countries are, however, not alone with ‘incentives problems’. The section on long term net replacement rates showed that for low income levels the replacement rates were high and constant in most countries. This result is often due to ‘topping-up’ to a guaranteed minimum standard.     

Analysis of wage flexibility across the Euro Area: evidence from the process of convergence of the labour income share ratio

This article analyses wage flexibility as a factor in the unemployment rate across 12 Euro Area countries. We use extensive evidence pertaining to the countercyclical behaviour of the labour income share ratio to estimate its equilibrium value in the long run. This measure is calculated using a hybrid New Keynesian Phillips curve. Additionally, by using spatial econometrics, we can incorporate into the study the interdependence in the inflation among the countries. As a result, we identify countries that might see an improvement in their employment rates by improving their wage flexibility. We also identify countries with high unemployment that is not a consequence of a lack of wage flexibility.     

Finance and unemployment: new panel evidence

The effect of credit market imperfections on unemployment is largely investigated in the context of financial crises. This paper shifts the focus toward financial development and structure in a panel of advanced and developing countries. Some important findings emerge. Unemployment increases with financial development and concentration in banking markets but decreases with market orientation, the effect is stronger in magnitudes for young workers than female ones. More rigid market regulation increases unemployment. These findings are particularly pronounced for countries with higher income, better developed financial sectors, lower income inequality, greater trade openness, higher democracy, and common-law systems.     

Testing for hysteresis in unemployment an unobserved components approach

We suggest a new test for hysteresis in unemployment based on an unobserved components model. Observed unemployment rates are decomposed into a natural rate component and a cyclical component. The impact of lagged cyclical shocks on the current natural component is the measure of hysteresis. To identify the two components of unemployment, we assume that the cyclical compoentn is correlated with capacity utilization. The model is applied to U.S. and German data. We find no evidence of hysteresis in U.S. data. German unemployment rates exhibit substantial hysteresis. A shock of 1.0 percent to the current cyclical component permanently increases future German natural rates by about 0.5 percent. For both countries, natural rate shocks turn out to be an important impulse mechanism to explain movements in observed unemployment rates.     

ASSESSING THE IMPACTS OF LABOR MARKET AND DETERRENCE VARIABLES ON CRIME RATES IN MEXICO

Many studies examine the relationship between crime rates and various economic and/or sociodemographic variables in high income countries, but similar efforts for middle and low income countries are less common. Utilizing an 8‐year panel data sample for all 32 states in Mexico, this study assesses the impact of Mexican labor market and deterrence variables on various Mexican crime rates. The principal results indicate that: (1) State gross domestic product (GDP) per capita has ambiguous effect on crime rates under different conditions. Both wages and unemployment rates are negatively linked with crime rates. (2) Although the Mexican judicial and public security systems are widely believed to be ineffective, increased federal police forces and incarceration rates are associated with lower crime rates, but higher public security expenditure per capita is associated with higher crime rates. (3) The impacts from labor market and deterrence variables presented in (1) and (2) continue to hold under the Fox administration as well as for non‐border states. Their respective impacts diminish, however, under the Calderon administration as well as for border states because of the small number of observations. Overall, the results indicate that increasing average wages, federal police forces, and incarceration rates would have significant impacts on reducing crime rates in Mexican states. (JEL O54, K42)     

The effects of bureaucracy on political accountability and electoral selection

This paper examines how bureaucracy affects political accountability and electoral selection, using a three-tier political agency model consisting of voters, politicians and bureaucrats. In the model’s hierarchy, politicians are constrained by elections while bureaucrats are controlled by budgets. If voters and bureaucrats prefer different types of politicians (i.e. they have a conflict of interests), incumbents pass oversized budgets to prevent bureaucrats from engaging in strategic behaviours that damage incumbents’ reputations. If, instead, voters and bureaucrats prefer the same type of politicians (i.e. they have an alignment of interests), bureaucrats cannot obtain a concession from politicians. In the latter case, however, bureaucrats send voters a credible signal regarding an incumbent’s type, which improves electoral selection. This paper also shows that political appointment systems improve political accountability in the conflict-of-interests case while they weaken electoral selection in the alignment-of-interests case.     

Election systems,the “beauty premium” in politics,and the beauty of dissent

We ask three questions. First, do election systems differ in how they translate physical attractiveness of candidates into electoral success? Second, do political parties strategically exploit the “beauty premium” when deciding on which candidates to nominate, and, third, do elected MPs use their beauty premium to reap some independence from their party? Using the German election system that combines first-past-the-post election with party-list proportional representation, our results show that plurality elections provide more scope for translating physical attractiveness into electoral success than proportional representation. Whether political parties strategically use the beauty premium to optimize their electoral objectives is less clear. Physically attractive MPs, however, allow themselves to dissent more often, i.e. they vote more often against the party line than their less attractive peers.     

Does public‐sector employment fully crowd out private‐sector employment?

Employment matters for development because it can raise household income, lower inequality, promote economic growth, and contribute to political stability. Many countries have high rates of public employment, but what effect does this have on overall employment and unemployment rates? This paper investigates if and to what extent public‐sector employment crowds out (reduces) private‐sector employment. In particular, we estimate regressions of unemployment or private‐sector employment on two measures of public‐sector employment. The study uses an especially assembled dataset, which is novel for its coverage of a large sample of developing countries as part of a panel of rich and poor countries. Our results point to full or just about full crowding‐out for the entire sample. Unlike previous cross‐country studies, which were restricted to advanced economies, we are able to show that these results also apply to developing countries, although crowding‐out may not be quite as high as in advanced economies. The results mean that high rates of public employment have an offsetting large negative impact on private employment rates and do not reduce overall unemployment rates. With the qualifier that government activities may help the economy in other ways, our results imply that, rather than creating public‐sector jobs, scarce fiscal resources could be better spent on other developmental needs.     

Unions, progressive taxes, and education subsidies

Progressive income taxes moderate distortionary wage demands by trade unions and thereby reduce unemployment, and at the same time underlie disincentives to acquire skills and decrease labour productivity. Governments can respond by combining progressive taxes with subsidies to investment in human capital. A system of generous education subsidies and steep progressive tax rates is more likely to emerge, the greater the market power of trade unions and the better the ability of governments to influence private education decisions. Empirical analysis for several OECD countries provides results consistent with these propositions. A policy mix of high education subsidies and relatively progressive income taxes is found in countries where union membership is significant.     

Entrepreneurs,jobs, and trade

We propose a simple theory of endogenous firm productivity, unemployment, and top income inequality. High-talented individuals choose to become self-employed entrepreneurs and acquire more managerial (human) capital; whereas low-talented individuals become workers and face the prospect of equilibrium unemployment. In a two-country global economy, trade openness raises firm productivity, increases top income inequality, and may reduce welfare in the country exporting the good with lower relative labor-market frictions. Trade openness reduces firm productivity, lowers top income inequality, and necessarily raises welfare in the other country. The effect of trade on unemployment is ambiguous. Unilateral job-creating policies increase welfare in both countries. However, they reduce unemployment and raise top income inequality in the policy-active country; and reduce top income inequality while increasing unemployment in the policy-passive country.     

Low-wage import competition and populist backlash: The case of Italy

This paper studies empirically the role of trade globalization in shifting the electoral base towards populism. We proxy the trade shock with swiftly rising import competition from China and compare voting patterns at the national parliamentary elections from 1992 to 2013 in about 8000 Italian municipalities differently exposed to the trade shock. We instrument import competition from China with Chinese export flows to other high-income countries and estimate the model in first differences. Our results indicate that trade globalization increases support for populist parties, as well as invalid votes and abstentionism. To rationalize these findings, we offer evidence that import competition worsens local labor market conditions – higher unemployment, lower income and durable consumption – and increases inequality. Finally, we point out that local public expenditure may play a role in mitigating the political consequences of the trade shock, arguably because it alleviates economic distress.