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WELFARE STATE FUTURES
Final Newsletter Series #04/2019

Research Cluster - Globalization, Welfare States & Inequalities

Dear <<Full Name>>,

The WSF Final Newsletter Series has been designed in order to inform you about the most important findings from the 15 individual WSF research projects.

Issue #04/2019 reports on the key findings of the Globalization, Welfare States & Inequalities projects.

The projects in the cluster address the following questions:
What are the determinants and patterns of inequality and how are citizen’s preferences for redistribution and welfare services formed? What is the role of welfare state policies in countering the labor market and income inequality effects of globalization? How can welfare states meet recent challenges and how can concerns for personal responsibility be integrated in the design of welfare schemes in a way that is perceived as fair? What happens to workers affected by technological innovation and how may this interact with welfare institutions such as unemployment benefits? How do the transnationalization of citizenship and welfare rights impact EU welfare states?

Your WSF Scientific Coordination Office
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News from the Scientific Programme Coordinator
Scientific Programme Coordinator Ellen Immergut

Dear WSF Researchers and Stakeholders,
 
This issue of the newsletter is the fourth of five final newsletter issues.  Each focuses on three projects from the WSF programme.  In this issue we focus on the Cluster Globalization, Welfare States and Inequalities with reports from the GlobLabWS, 4Is and GiWES projects.

As a special we include a stakeholder reflection in this newsletter. Sigrun Aasland, Director of Analysis at Think Tank Agenda (www.tankesmienagenda.no), sums up her views on the program focusing on the benefits of mixing researchers and policy makers. In addition we provide you with the latest information of the 15 WSF projects. We have a new Alumni!


With all best wishes,
Ellen Immergut

Stakeholder Reflections - The Benefits of Mixing Researchers and Policy Makers
by Sigrun Aasland, Director of Analysis at Think Tank Agenda (www.tankesmienagenda.no)

Dear recipients of the WSF Newsletter,
I am Sigrun Aasland and I work in a policy think tank. I am not a researcher myself. I am instead an eager consumer of research that can inform policy. Across Europe, we are seeing increasing inequalities even in countries with strong welfare states and redistribution policies. One of our big challenges is, as I see it, to find new tools with which to redress these inequalities. We need to be further strengthening our welfare states in the face of new technologies, globalisation, and other drivers of inequality.

In this note I reflect on what I see as some benefits of mixing researchers and policymakers.

First, including policymakers in the final process of papers is valuable for a number of reasons. They say law and sausage are two things you do not want to see being made. Research and science on the other hand, you do want to see in production. In the world of science, all findings are the result of representative data collection, rigorous and transparent methods, testing findings and their statistical significance, and finally presenting the results to peers for critical comments.  There is no tolerance for dubious interpretations and careless use of facts. This is, of course, particularly valuable in a time when access to information is abundant and many find it increasingly difficult to separate true from false.

Policymakers are not researchers, but need to understand methods sufficiently to read, and contest, claims in the public debate. We also need to remind ourselves where facts and knowledge is coming from. Finally, while policymakers often- but far from often enough – invite researchers to speak on selected topics, this is typically on issues and questions already defined and where research already published may shed some light. By then the policymakers may already have decided what they want to know. It is rarer for policymakers to listen to what researchers themselves prioritised and studied first-hand, even before they publish their papers.

Second, I found the cross-disciplinary nature of this research programme as I came to know it through last years’ Final Conference intriguing. NORFACE Welfare State Futures united researchers not by their discipline but by a shared concern for equity, redistribution and social protection. That does not mean that they agreed on any particular political direction or on policy solutions, or that this was a conference of activism or alarmism. The common basis did however motivate important policy discussions, both in the sessions and during breaks.

Third, the program was an excellent networking opportunity to meet researchers as well as policymakers, across disciplines, countries, and institutions.

GlobLabWS
Globalisation, Labour Markets, and the Welfare State


Catia Montagna | University of Aberdeen (UK)

Holger Görg | Kiel Institute for the World Economy (Germany)

Fredrik Sjöholm | Lund University (Sweden)

Current policy debates about the welfare state are often based on very narrow theoretical underpinnings that fail to capture the complexity of the interactions and the adjustments processes characterising the impact of welfare state policies on the aggregate economy and, specifically, on labour markets. A richer characterisation of the economic environment casts doubts on key conventional tenets.
Project Report
The Globalisation, Labour Markets and Welfare State (GlobLabWS) project focuses on the interaction between globalization and welfare state institutions in determining aggregate labour market outcomes. One of its key objectives was to enhance understanding of the micro-economic foundations of the macro-economic adjustments resulting from globalisation and the role of the welfare state in influencing them.

The project studied, in particular, the aspects of the welfare state that concern labour markets. This choice reflects the centrality of labour market institutions and policies to debates about globalisation. On the one hand, the perception that globalisation generates economic dislocations, greater insecurity and inequality has led to greater demands for social protection. On the other hand, concerns about international ‘competitiveness’ have underpinned drives towards labour market deregulation and reductions in the generosity of social protection as a means to reduce ‘distortions’ and firms’ costs. In recent years, the notion of flexicurity has been widely embraced as a guideline for welfare state reforms capable of addressing both of these concerns. At its core lies the idea that insurance for the unemployed and protection of employment (rather than jobs) via active labour market policies (ALMPs) that enhance employability can be combined with reductions of labour market rigidities, thus allowing firms to respond flexibly to changes in competitive conditions.

Two key premises underpin our approach. First, many conventional tenets are based on narrow theoretical underpinnings that fail to internalise the complexity of policy interactions and feedback effects. Second, the nature of globalisation has changed: comparative advantage patterns of specialisation need to be understood in the context of unprecedented degrees of fragmentation of vertical production chains across national borders which imply that the effects of international trade cut across industry boundaries and are more difficult to predict.

Against this background, the project has sought to achieve two main objectives:

The first was to highlight major links through which globalisation affects labour markets and the nature of its effects on key labour market outcomes such as unemployment and skill mismatch.

The second was to identify the mechanisms through which welfare state and labour market policies affect the microeconomic (e.g. incentives and decisions at the individual household and firm level) and macroeconomic adjustments (e.g. aggregate rates of unemployment) to globalisation and shocks.

From a scientific perspective, a major contribution of the project has been to help address the micro-macro dichotomy that still too often characterises the study of the welfare state.

At a theoretical level, we have developed models in which behavioural micro-foundations are embedded within dynamic general equilibrium frameworks that enable us to capture the interaction and feedback effects between a relatively ‘rich’ menu of welfare state policy instruments, labour market institutions and aggregate performance. At an empirical level, our multi-country focus moves beyond that of micro-econometric studies that examine the individual treatment effects of welfare state policies and hence allows to capture empirically their aggregate effects.

Our results have a number of important implications.

Negative shocks to an economy (such as productivity, foreign demand, or trade shocks) typically result in an under-utilisation and misallocation of resources that lead to lower aggregate productivity, employment and GDP.

Changes in the degree of globalisation alter skill composition within firms and contribute to explain inter-firms differences in employment structure (Davidson et al. 2016, 2017). Reliance on the international production chain also imply that economic shocks do not only affect the level of employment (in the aggregate and by skill type) but also the degree of mismatch between the skills possessed by workers and those required by employers, increasingly in the form of over-education (Molana, Montagna, Onwordi, 2018a, b, c).

Figure 1 below shows, for Sweden, that improvement in ‘match quality’ in the labour market may have been driven by the increase in the degree of economic integration (falling tariff rates).
However, stylised facts suggest that the extent of skill-mismatch is affected by the welfare system. As can be seen from Figure 2 below, the UK – which can be characterised as a liberal welfare state system and which has the highest degree of flexibility and lowest level of expenditure on both active and passive labour market policies among the four countries considered in the graph – exhibits the highest level of mismatch.
Reforming a liberal welfare state such as the UK’s system in the direction of flexicurity involves increasing the degree of labour market ‘rigidity’ as well as expenditure on active labour market policies; contrary to conventional wisdom, we find that doing so can improve labour market outcomes (i.e. reduce unemployment and enhance job-match quality) and aggregate performance (i.e. increase aggregate productivity, GDP and welfare) as well as help the economy to better withstand and overcome the effects of negative shocks.

Thus, a key implication of our project is that an ‘efficient’ labour market does not need to be thin on security.

As an example, we find that unemployment benefit insurance, a typical passive labour market policy (PLMP) which is widely viewed as a key source of labour market distortions, can contribute to increase employment and GDP by inducing labour force participation. Its effects are strengthened when combined with active labour market policies (ALMPs). This is consistent with the evidence in Figure 3 below which displays the skilled, unskilled and economy-wide participation rates and expenditure on active and passive labour market policies for Denmark, Germany and the UK.
More generally, our results imply that labour market rigidity is not the most important factor: crucial is the ‘social investment’ dimension of the welfare state.

Measures that support employability (such as training of the unemployed), vacancy creation, and the efficiency of job match (such as investment in public employment services that can increase the ease with which workers meet firms and find jobs with appropriate levels of qualifications) can be particularly effective in stimulating labour force participation and in sustaining employment and aggregate productivity.

Given the dislocation effects of globalisation, our work also implies that the importance of policies for employability increases as a result of globalization. Increased trade and foreign direct investment changes the structure of the workforce in the home country, with an increased importance of more skilled occupations (Davidson et al. 2016, 2017). Less skilled workers typically requires training to remain the job force.

We show that these policies can complement social protection not only in moderating the effects of negative shocks but also in sustaining aggregate productivity growth by activating virtuous interactions between passive and active labour market policies (Molana, Montagna, Onwordi, 2018a,b,c).

Consistent with these results, our comparison of economies characterised by different welfare state regimes suggest that the ‘Nordic’ system ‘wins’; and key to its success is the social investment dimension: employability, enabling and activation policies are fundamental components of a successful welfare system (Molana, Montagna, Onwordi, 2018b).

Another implication of our work is that it is important to recognise that the initial policy mix within a country matters in determining the aggregate impact of any welfare reform as shown by Gӧrg, Hornok, Montagna and Onwordi (2018) who study the effects of welfare state reforms on the short and long-run responsiveness of aggregate employment to changes in output in 20 OECD countries.

More broadly, a major implication of our work is that it is paramount to recognise and exploit policy interactions not only among welfare state policies but among different policy areas (such as education and industrial policies). For example, we show that the effectiveness of welfare state policies in countering the effects of negative shocks on employment is affected by the productivity distribution of firms within industries (Görg, Henze, Jienwatcharamongkhol, Kopasker, Molana, Montagna, Sjöholm, 2017). As a result, industrial policies that affect net firm formation can strengthen the effectiveness of welfare state policies in sustaining employment and labour market participation (Molana, Montagna, Onwordi, 2018c).

Accordingly, the graphs in Figure 4 below illustrate the impact of increasing trade costs on key variables (GDP, unemployment rate, participation rate, and mismatch). As is clear from the figures, while labour market reforms (LMR) of a liberal welfare state system in the direction of flexicurity can benefit the economy in terms of moderating the impact of a trade shock, greater benefit can be achieved through a simultaneous reform in the product market.
Overall, our results suggest that welfare state retrenchments are not necessary to sustain a country’s ability to compete in globalised markets. As a further example, against conventional wisdom, higher welfare spending by a country increases its ability to attract and retain internationally mobile firms (Driffield, Görg, Temouri, 2018).
References
Davidson C., F. Heyman, S. Matusz, F. Sjöholm, S. C. Zhu (2016), “Global Engagement, Complex Tasks and the Distribution of Occupational Employment”, Review of International Economics, Vol 24, Issue 4, 717-736.

Davidson C., F. Heyman, S. Matusz, F. Sjöholm, S. C. Zhu (2017), “Global Engagement and the Occupational Structure of Firms”, European Economic Review, Vol 100, 273 – 292.

Driffield, N., H. Görg, Y. Temouri (2018), “Multinational Enterprises and the Welfare State”, Kiel Institute for the World Economy.

Görg, H., P. Henze, V. Jienwatcharamongkhol, D. Kopasker, H. Molana, C. Montagna, F. Sjöholm “Firm Size Distribution and Employment Fluctuations: Theory and Evidence”, Research in Economics, vol 71, no.4, pp. 690‐703.

Gӧrg, H., C. Hornok, C. Montagna and G.E. Onwordi (2018), “Employment's Responsiveness to Output and Labor Market Policies: Evidence from OECD countries”, Kiel Institute for the World Economy.

Molana, H., C. Montagna, G.E. Onwordi (2017), “Reforming the Liberal Welfare State: International Shocks, Unemployment and Household Income Shares', Discussion Paper in Economics, no. 6, vol. 17, University of Aberdeen Business School, pp. 1-41.

Molana, H., C. Montagna, G.E. Onwordi (2018a), “De-Globalisation, Welfare State Reforms and Labour Market Outcomes”, NORFACE Welfare State Futures, Working Paper: GlobLabWS 2/2018.

Molana, H., C. Montagna, G.E. Onwordi (2018b), “Comparing Welfare States: Openness, Shocks and Labour Market Outcomes”, NORFACE Welfare State Futures, Working Paper: GlobLabWS 3/2018.

Molana, H., C. Montagna, G.E. Onwordi (2018c). “Competitive Selection, Globalisation and the Labour Markets: Welfare State and Industrial Policies”, NORFACE Welfare State Futures, Working Paper: GlobLabWS 4/2018.

4IS

Inequalities, Insurance, Incentives and Immigration: Challenges and Solutions for the Welfare State


Eva Mörk | Uppsala University (Sweden)

Mike Brewer | University of Essex (UK)

Juka Pirttilä | University of Tampere (Finland)

Kaisa Kotakorpi | University of Turku (Finland)
Project Report
The 4Is project investigate how recent challenges, such as increased economic uncertainty and ethnic diversity, have affected inequality and support for the welfare state in European countries.
 
When countries face a large economic crises, such as the recent Great Recession, tax and benefit policies play an important role in how individuals are affected. In "Europe Through the Crisis: Discretionary Policy Changes and Automatic Stabilisers", A Paulus and I Tasseva study the contribution of automatic stabilisers and discretionary policy changes to income changes in the EU countries between 2007 and 2014. Even though tax-benefit policies affect household incomes through two main channels: discretionary policy changes and automatic stabilisers, little is known about the link between automatic stabilisers and the income distribution. The Figure below illustrates the findings. Discretionary policy changes and the automatic stabilisation response of policies more often worked to reduce inequality of net incomes, and so helped offset the inequality-increasing impact of a growing disparity in gross (pre-tax) market incomes. During the studied period, inequality reduction was achieved mainly through policy changes to benefits and benefits acting as automatic stabilisers. On the other hand, policy changes to and the automatic stabilisation response of taxes and social insurance contributions raised inequality in some countries and lowered it in others.
The large inflow of migrants to the EU have also challenged the welfare state.  In “The Price of Sharing: Support for Universal and Equal Access to Health Care in Diversifying Neighborhoods” A Neundorf and C Cavaille ask whether immigration is undermining mass support for the welfare state? While an increase in the number of immigrants might not impact the willingness to fund existing universal programmes such as health care, it can undermine the normative commitment to universal and equal access to care. These norms are key to the support public health care systems usually command. Using British panel data matched to contextual data from the 1991 and 2001 censuses, the authors show that individuals who experience an increase in the share of foreign born in their neighbourhood become less likely to support universal access to health care.
 
Another concern in connection with the large inflow of migrants is the emergence of ethnically segregated neighbourhoods. In “Migrating Natives and Foreign Immigration: Is There a Preference for Ethnic Residential Homogeneity?”, H Andersson, H Berg and M Dahlberg investigate the migration behaviour of the native population following foreign (refugee) immigration, with a particular focus on examining whether there is support for an ethnically based migration response. If ethnicity is the mechanism driving the change in natives' migration behaviour, the maintained hypothesis is that native-born individuals who are ethnically similar to arriving refugees should not change their migration behaviour to the same extent as native-born individuals with native-born parents (who are ethnically quite different from refugees). Using rich geo-coded register data from Sweden, spanning over 20 consecutive years, the authors account for possible endogeneity problems with an improved so-called shift-share" approach; in particular, the strategy combines policy-induced initial immigrant settlements with exogenous contemporaneous immigration as captured by refugee shocks. When studying the full population, they find no evidence of neither native flight nor native avoidance. However among individuals who are expected to be more mobile, all natives, irrespective of their parents' foreign background, there is evidence of native flight. These results indicate that preference for ethnically homogeneous neighbourhoods may not be the dominant channel inducing flight. The estimates instead indicate that immigration leads to more socio-economically segregated neighbourhoods. This conclusion may have implications for the ethnically based tipping point literature.
 
Another important issue for the input to governments’ decisions on how to finance the welfare system and redistribute income while maintaining incentives to work and avoiding poverty traps is to understand how the work incentives embedded in the existing tax- and benefit systems and how these affect individuals’ behaviour, both in the short and in the long run.  These questions have been analysed within the project.
 
In “The Anatomy of the Extensive Margin Labor Supply Response” S Bastani, Y Moberg and H Selin estimate labor force participation elasticities for married women in Sweden using rich population-wide administrative data and a reform to the tax/transfer-system for identification. They add to the scarce literature estimating participation elasticities using quasi-experimental methods. The authors estimate an average participation elasticity of 0.13 and present graphical evidence on the behavioral response to the reform. The paper also highlights that estimated extensive margin responses necessarily are local to the observed equilibrium. Elasticities are twice as large in the lowest-skill sample (with relatively low employment) as compared to the highest-skill sample (with high employment). In “Screening through activation? Differential effects of a youth activation programme”, C Hall, K Kotakorpi, L Liljeberg and J Pirttilä study the dual role of active labour market policies: First, ALMP may perform a screening role by increasing the incentives for job search especially among individuals with good labour market prospects, already prior to programme participation. Second, actual programme participation may help individuals with poor labour market prospects. The authors examine whether this type of a pattern can be found in individual responses to a major nationwide youth activation programme in Sweden. They analyse individual responses to the programme using an RD design. The paper finds that individuals with a high predicted probability of finding work respond to the threat of activation, whereas there is no effect for individuals with weak labour market prospects.
 
When evaluating different policy programs, one typically investigate effects on employment, and income. In “Putting measures of individual well-being to use for ex-ante policy evaluation”, X Jara and E Schokkaert illustrate how ex-ante policy evaluation can be performed in terms of richer concepts of individual well-being, such as subjective life satisfaction and equivalent incomes. Most studies using microsimulation techniques have considered the effect of potential reforms on the income distribution. However, it has become increasingly recognized, both at the academic and political level, that focusing purely on income provides a limited picture of social progress. The analysis in the paper makes use of EUROMOD, the EU-wide tax-benefit microsimulation model, along with 2013 EU-SILC data for Sweden, which for the first time provides information on life satisfaction. The results show that the effect of potential reforms varies widely depending on the well-being concept used in the evaluation.

GiWES

Globalisation, Institutions and the Welfare State


Karl O. Moene | University of Oslo (Norway)

Christian Dustmann | University College London (UK)

Oddbjørn Raaum | Ragnar Frisch Centre for Economic Research (Norway)

Rudolf Winter-Ebmer | Johannes Kepler University of Linz (Austria)

Project Report
The 4Is project investigate how recent challenges, such as increased economic uncertainty and ethnic diversity, have affected inequality and support for the welfare state in European countries.
 
When countries face a large economic crises, such as the recent Great Recession, tax and benefit policies play an important role in how individuals are affected. In "Europe Through the Crisis: Discretionary Policy Changes and Automatic Stabilisers", A Paulus and I Tasseva study the contribution of automatic stabilisers and discretionary policy changes to income changes in the EU countries between 2007 and 2014. Even though tax-benefit policies affect household incomes through two main channels: discretionary policy changes and automatic stabilisers, little is known about the link between automatic stabilisers and the income distribution. The Figure below illustrates the findings. Discretionary policy changes and the automatic stabilisation response of policies more often worked to reduce inequality of net incomes, and so helped offset the inequality-increasing impact of a growing disparity in gross (pre-tax) market incomes. During the studied period, inequality reduction was achieved mainly through policy changes to benefits and benefits acting as automatic stabilisers. On the other hand, policy changes to and the automatic stabilisation response of taxes and social insurance contributions raised inequality in some countries and lowered it in others.
STAY CONNECTED | WSF ALUMNI
Cornelius Cappelen | University of Bergen
At the end of the FPRWS project, Cornelius Cappelen was tenured as an associate professor at the department of Comparative Politics, University of Bergen. Even though the FPRWS project has officially ended, the interdisciplinary research it spurred still remains, and Cappelen continues his collaborative work with economists on issues related to public opinion and the welfare state.  In a new project, he explores how attitudes toward social security, such as unemployment compensation, are affected by labor market characteristics of recipients.

Cornelius can be contacted via Cornelius.cappelen (at) no.uib
Website: https://www.uib.no/personer/Cornelius.Cappelen

Ingunn Ellingsen | University of Stavanger
After our final meeting in the FACSK project (Family Complexity in Social Work) held in Dublin last June (2018), Ingunn T. Ellingsen is still busy analyzing data and prepare scientific articles from the project in collaboration with other researchers from the project. She found it inspiring to be part of the FACSK team. It offered an unique opportunity to build network and collaborate with researchers who share similar research interests. Ingunn now leads a research group at her department at the University of Stavanger on Multi-disciplinary child welfare research, and she is ready to explore new research questions.

Ingunn can be contacted via ingunn.t.ellingsen (at) uis.no
Website: https://www.uis.no/article.php?articleID=73486

Anita Heindlmaier | University of Salzburg
After completing her PhD in the context of the TransJudFare project, Anita Heindlmaier currently works as a postdoctoral researcher at the University of Salzburg where she is part of the project “Rebalancing the Enlarged Single Market” (RESiM), a joint project of the Universities of Salzburg and Bremen. RESiM analyses the social rebalancing in the enlarged single market by considering three forms of atypical labour migration: marginal employment, solo self-employment and posted work. Anita Heindlmaier thus continues her research on free movement and social rights of mobile EU citizens, now with a focus on labour mobility.

Anita can be contacted via anita.heindlmaier (at) sbg.ac.at
Website: www.uni-salzburg.at/pol/heindlmaier

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