An Unemployment Insurance Scheme for the Euro Area? A Comparison of Different Alternatives using Micro Data Mathias Dolls 1, Clemens Fuest 1, Dirk Neumann 2, Andreas Peichl 1 InGRID Expert Seminar Minimum income protection in Europe... and how to study it November 27, 215, Antwerp 1 ZEW 2 CORE UCLouvain Dirk Neumann (CORE) Euro Area UI November 27, 215 1 / 19
More fiscal integration in the Eurozone? Debt crisis EMU debate about deeper fiscal integration. Why? Low labor mobility in EMU Lost access to private capital markets (households, governments) Monetary policy at central level removed instrument of national exchange rate adjustment National fiscal policies partly de-stabilizing (pro-cyclical) during crisis Van Rompuy (212): Towards a genuine economic and monetary union: Strengthening discipline alone is [...] not sufficient. In the longer term, there is a need to explore the option to go beyond the current steps to strengthen economic governance by developing gradually a fiscal capacity for the EMU. Dirk Neumann (CORE) Euro Area UI November 27, 215 2 / 19
More fiscal integration in the Eurozone? One of the functions of such a new fiscal capacity could be to facilitate adjustments to country specific shocks by providing for some degree of absorption at the central level. Moreover, low levels of cross-country labor mobility and structural impediments to price flexibility make economic adjustment mechanisms less effective than in other monetary unions. Asymmetric shock absorption at the central level would represent a form of limited fiscal solidarity exercised over economic cycles, improving the economic resilience of the EMU. Elements of fiscal risk sharing can and should be structured in such a way that they do not lead to permanent transfers across countries or undermine the incentive to address structural weaknesses. Dirk Neumann (CORE) Euro Area UI November 27, 215 3 / 19
More fiscal integration in the Eurozone? Aim: Improve macroeconomic stability in EA through fiscal risk sharing absorb shocks which hit member states asymmetrically via smoothing income fluctuations over time and across regions (Asdrubali et al. 1996, Fatás 1998, Forni and Reichlin 1999) Concerns: Permanent redistribution from high to low income countries/households (Persson and Tabellini 1996a) Moral hazard (at the individual level, with administration and economic policy) (Persson and Tabellini 1996b) Dirk Neumann (CORE) Euro Area UI November 27, 215 4 / 19
More fiscal integration in the Eurozone? Possible designs of a fiscal capacity: Macroeconomic approach: Fiscal insurance mechanism: e.g. transfers according to relative output gap differences (Enderlein et al. 213) Rainy-Day Fund (Furceri and Zdzienicka 213) European fiscal equalization mechanism (Bargain et al. 213) Microeconomic approach: Unemployment insurance scheme (Dullien 213, Feyrer and Sacerdote 213) Contingent re-insurance mechanism (Gros 214) (Partly) integrated tax-transfer system (Bargain et al. 213) Dirk Neumann (CORE) Euro Area UI November 27, 215 5 / 19
More fiscal integration in the Eurozone? Possible designs of a fiscal capacity: Macroeconomic approach: Fiscal insurance mechanism: e.g. transfers according to relative output gap differences (Enderlein et al. 213) Rainy-Day Fund (Furceri and Zdzienicka 213) European fiscal equalization mechanism (Bargain et al. 213) Microeconomic approach: Unemployment insurance scheme (Dullien 213, Feyrer and Sacerdote 213) Contingent re-insurance mechanism (Gros 214) (Partly) integrated tax-transfer system (Bargain et al. 213) Dirk Neumann (CORE) Euro Area UI November 27, 215 5 / 19
More fiscal integration in the Eurozone? Possible characteristics of an EMU-UI system: Scope: (Partly) replacing or complementing national systems Basic EMU-UI: ensure that minimum standards are guaranteed Extended Benefits: increase insurance effects in prolonged recessions (in the US: large federal UI extensions in the Great Recession) Financing: With or without experience rating, claw-back mechanisms... Benefits: Non-contingent: EMU-UI permanently in place Contingent: EMU-UI kicks-in only in severe economic crises ( triggered ) Dirk Neumann (CORE) Euro Area UI November 27, 215 6 / 19
Empirical approach Data and methodology: Counterfactual simulations of unemployment shocks and EMU-UI for EA18 member states over the period 2-13 Simulate a sample of repeated cross-sections using EU-SILC reflecting changes in (short-term) unemployment, earnings, size and composition of labor force for 18 socio-demographic population groups + overall Therefore: impute yearly information from EU-LFS: socio-demographic characteristics AMECO: nominal earnings growth Introduce a basic EMU-UI that partly replaces national UI systems Interpretation of the analysis: what would have happened if an EMU-UI had been created in 2? Dirk Neumann (CORE) Euro Area UI November 27, 215 7 / 19
Empirical approach Key features of the simulated UI scheme (baseline): EMU-UI 5% of previous gross earnings Scheme is calibrated so that it is revenue neutral (at EA level) over the period 2-13. Total contribution rate for EMU-UI: proportional payroll tax of 1.6% on all employment income Eligible for EMU-UI benefits are all new unemployed with previous employment income, up to 12 months Alternative scenarios: Contingent benefits: trigger -based (Experience rating, different coverage rates and generosity levels) Dirk Neumann (CORE) Euro Area UI November 27, 215 8 / 19
Empirical approach Simplifying assumptions: Partial equilibrium analysis: does not take into account general equilibrium effects of EMU-UI No behavioral responses: individual, government+administration First-round effects Interaction between EMU-UI and national UI systems: national UI systems are cut back, but top-up EMU-UI scheme if national UI system is more generous Fixed EMU: analysis as if EA18 had existed from 1999 onwards Dirk Neumann (CORE) Euro Area UI November 27, 215 9 / 19
Coverage rates of EMU-UI and national UI in % of labor force 27 24 21 18 15 12 9 6 3 GR 56 48 4 32 24 16 8 in % of unempl. in % of labor force 15 12 9 6 3 IE 71 63 55 47 39 31 23 2 in % of unempl. in % of labor force 22 24 26 28 21 212 2 22 24 26 28 21 212 27 24 21 18 15 12 9 6 3 SP 85 77 69 61 53 45 37 29 21 13 in % of unempl. in % of labor force 12 9 6 3 GE 56 48 4 32 2 22 24 26 28 21 212 2 22 24 26 in % of unempl. 28 21 212 Unempl. Rate Coverage EMU-UI Share EMU-UI recipients Coverage National-UI Dirk Neumann (CORE) Euro Area UI November 27, 215 1 / 19
Average yearly net contributions 2-13.75.5.25 in % of GDP -.25 -.5 -.75-1 -1.25-1.5 AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP Net contributor Net recipient Min / Max Dirk Neumann (CORE) Euro Area UI November 27, 215 11 / 19
Automatic fiscal stabilization Household income stabilization (Dolls et al. 212): τ hh = i B i i SIC i i Y EMPL i (1) Government budget stabilization: τ gov = ( i Bi NAT i SIC NAT i ) ( i Bi i Y EMPL i NAT,dual NAT,dual i SICi ) (2) Total stabilization: τ tot = τ hh + τ gov (3) Dirk Neumann (CORE) Euro Area UI November 27, 215 12 / 19
Automatic fiscal stabilization in % of income shock 3 25 2 15 1 5-5 -1 Household income stabilization 9 1 11 12 13 9 1 11 12 13 9 1 11 12 13 9 1 11 12 13 9 1 11 12 13 GR IE IT PT SP Baseline Cap, waiting per., 35% repl. rate Cap, waiting per. National UI Dirk Neumann (CORE) Euro Area UI November 27, 215 13 / 19
Automatic fiscal stabilization Government budget stabilization in % of income shock 1 8 6 4 2-2 -4 9 1 11 12 13 9 1 11 12 13 9 1 11 12 13 9 1 11 12 13 9 1 11 12 13 GR IE IT PT SP Baseline Cap, waiting per., 35% repl. rate B: Cap, waiting per. Dirk Neumann (CORE) Euro Area UI November 27, 215 14 / 19
Automatic fiscal stabilization in % of GDP.1.5 -.5 -.1 GE in % of GDP.45.35.25.15.5 -.5 GR in % of GDP.75.65.55.45.35.25.15.5 -.5 IE 2 22 24 26 28 21 212 2 22 24 26 28 21 212 2 22 in % of GDP 24 26 28 21 212.15.1.5 -.5 IT in % of GDP.3.2.1 -.1 PT in % of GDP.8.7.6.5.4.3.2.1 -.1 -.2 SP 2 22 24 26 28 21 212 2 22 24 26 28 21 212 2 22 24 26 28 21 212 Gov. budget Household inc. Total Dirk Neumann (CORE) Euro Area UI November 27, 215 15 / 19
Within-country heterogeneity FR young / male / low-skilled young / male / medium-skilled young / male / high-skilled young / female / low-skilled young / female / medium-skilled young / female / high-skilled middle / male / low-skilled middle / male / medium-skilled middle / male / high-skilled middle / female / low-skilled middle / female / medium-skilled middle / female / high-skilled old / male / low-skilled old / male / medium-skilled old / male / high-skilled old / female / low-skilled old / female / medium-skilled old / female / high-skilled 2 4 6 Gap young / male / low-skilled young / male / medium-skilled young / male / high-skilled young / female / low-skilled young / female / medium-skilled young / female / high-skilled middle / male / low-skilled middle / male / medium-skilled middle / male / high-skilled middle / female / low-skilled middle / female / medium-skilled middle / female / high-skilled old / male / low-skilled old / male / medium-skilled old / male / high-skilled old / female / low-skilled old / female / medium-skilled old / female / high-skilled SP 2 4 6 8 Gap Stabilization gap Coverage gap Dirk Neumann (CORE) Euro Area UI November 27, 215 16 / 19
Contingent benefits (cumulative net contributions) FR GE in % of GDP.75 1.25.5 -.25 -.5 -.75-1 2 1.5 1.5 -.5-1 1999 in % of GDP 21 23 25 27 29 211 213 1999 21 23 25 27 in % of GDP 29 211 213 5 4 3 2 1-1 NL in % of GDP 2-1 1-2 -3-4 -5-6 -7-8 SP 1999 21 23 25 27 29 211 213 1999 21 23 25 27 29 211 213 Baseline Contingent i) Contingent ii) Contingent iii) Dirk Neumann (CORE) Euro Area UI November 27, 215 17 / 19
Conclusions Budget: Significant EMU-UI with a relatively low overall budget Income redistribution: No permanent redistribution ex-ante but possible ex-post Contingent benefits would lead to less redistribution + more targeted transfers to member states with deteriorating labor market conditions Automatic stabilizers: Outlook: Significant short-term stabilization, but effect diminishes the longer the crisis lasts Trade-off between automatic stabilization effects and degree of cross-country redistribution Rather a mid/long-term solution; political consensus about fiscal risk sharing needed Paper: not a policy proposal but conceptual experiment under simplifying assumptions account for GE effects + behavior in future research Dirk Neumann (CORE) Euro Area UI November 27, 215 18 / 19
. Thank you for your attention! dirk.neumann@uclouvain.be Dirk Neumann (CORE) Euro Area UI November 27, 215 19 / 19
Comparison of different EMU-UI alternatives I Dirk Neumann (CORE) Euro Area UI November 27, 215 2 / 19
Comparison of different EMU-UI alternatives II Dirk Neumann (CORE) Euro Area UI November 27, 215 21 / 19
Budgetary effects and financial flows in billion euros 7 65 6 55 5 45 4 35 3 25 2 15 1 5 EA18 221222324252627282921211212213 SIC BEN Dirk Neumann (CORE) Euro Area UI November 27, 215 22 / 19
Experience rating in % of employment income 7 6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 1.5 AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP Annual balanced budget: Average contribution rate Annual balanced budget: Min. / Max. contribution rate Dirk Neumann (CORE) Euro Area UI November 27, 215 23 / 19