Welfare State Feedbacks: From outcomes to inputs

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• Welfare State Feedbacks From outcomes to inputs
• St. Restrup Herregaard
• 31 January-2 February 2007
• Labour market flexibility, inequality and human
  capital an integrated approach
• Jorgen Mortensen
• CEPS

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The socio-economic tectonic plates

• Labour market flexibility, rules and regulations
  do not emerge out of nowhere but are a result of
  the political and socio-economic decision making
• The functioning of the welfare state, inclusion
  and exclusion and the state of the civil society
  are determined to a large extent by the movements
  of socio-economic techtonic plates
• The level and age profile of human capital
  endowment and educational achievement constitute
  basic determinants of the movement of the
  tectonic plates

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An integrated approach

Human capital endowment
Labour market
Income inequalities
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EU-US employment gap
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Employment rates by skill levels
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Educational attainment of adult population
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Average years of schooling
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Classification of welfare systems
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Labour market flexibility a question of
educational attainment?Average job tenure for EU
countries and the US, 1993 and 2003 (years)
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Strictness of labour regulationOECD data
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Low educational attainmenthigh job protection?
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Low educations attainment inflexible labour
market?Distribution of employment by length of
tenure, percentage share, 2004 (years)
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Low educations attainment inflexible labour
market?(Job protection as a function of years of
schooling)
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Low educations attainment inflexible labour
market?(Job protection as a function of years of
schooling difference between actual and slope)
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 Explaining  rigidity

• A simple cross-section analysis shows a high
  degree of correlation between the strictness of
  labour market regulation (as dependent variable)
  and the level of educational attainment (as the
  independent variable).
• But there is a strong effect from  regime 
  (liberal versus corporatist)

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 Explaining  rigidity
Dependent variable Labour market regulations
(OECD data)
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 Explaining  rigidity

• However, this correlation could not possibly be a
  cause-effect relationship.
• So the conclusion is that this correlation is
  rather attributable to the political and
  institutional framework for wage determination
  and labour law.
• But as stressed in a recent French study this is
  not without costs for societal cohesion.

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 Explaining  income inequalities

• Educational attainment also seems to provide a
  significant explanation of income inequalities.
• This is probably largely a cause-effect
  relationship and in broad conformity with the
  predictions of human capital theory
• However, there is also a  regime effect  in
  this equation!

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 Explaining  income inequalities

• A high correlation between inequalities as
  dependent and educational attainment, notably
  when a proxy for  regime  is taken into
  account.
• But does this represent a cause-effects
  relationship and in which direction?

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 Explaining  income inequality
Dependent variable GINI coefficient, disposable
income
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Educational inequality

• Educational inequality to a considerable extent
  is associated with an age gradient 
• In a number of EU countries the level of
  educational attainment of the older generations
  is considerably lower than that of the younger
  generations while in the US the difference is
  insignificant the current level of educational
  attainment in the US is the same for all age
  groups.

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Educational attainment by age groups males
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Educational attainment by age groups females
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Tertiary education
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Educational inequality cause or effect of income
inequality?

• Educational inequalities in a number of countries
  have a strong age gradient, in the sense that
  the level of educational attainment in the
  younger generations, say 25-34, is considerably
  higher than that of the older generations.
• This constitutes a good part of the explanation
  of cross-country differences in education
  attainment.
• So it could be argued that todays income
  inequalities result from past failures to invest
  in human capital rather than the other way round.

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Conclusion (1)

• Economies with a high level of education have
  more flexible labour markets
• In Europe a low level of educational attainment
  is frequently associated with a strong cohort
  gradient (elderly have a lower level of education
  than the younger generation)
• But non-EU OECD countries in general have a lower
  level of job protection than EU countries
  (excl.UK)
• The EU-US employment gap is mainly an  education
  gap 
• Consequently labour market performance must be
  assessed through the  educational filter 

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Conclusion (2)

• Labour market flexibility and mobility can and
  should be enhanced with due attention to the
  level of education of the target group
• Adult training and learning is mainly absorbed by
  those who already have a high level of
  educational attainment and thus is not a solution
• So it is not a surprise that dual labour markets
  are mainly found in countries with low labour
  market flexibility

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Conclusion (3)

• There seems to be a need for differentiation of
  labour market policies according to the level of
  education of the various age groups and genders
• .. But this should be achieved by protecting
  people not jobs!!!