This New York Times story has it right: the German labor market now includes a sizable low-wage segment. This book has a very helpful comparison of developments in Germany with those in Denmark, France, the Netherlands, the United Kingdom, and the United States. My take on what this implies for incomes, poverty, and policy is here.
Archive for the 'Abroad' Category
Low wages in Germany
August 26, 2011Living standards in the U.K.
July 28, 2011Three very helpful reports on living standards in the United Kingdom:
James Plunkett, Growth without gain? The faltering living standards of people on low-to-middle incomes
Matthew Whittaker and Lee Savage, Missing out: why ordinary workers are experiencing growth without gain
Wenchao Jin, Robert Joyce, David Phillips, and Luke Sibieta, Poverty and inequality in the UK: 2011
To keep up with U.K. developments, I typically look to:
Centre for Analysis of Social Exclusion
Centre for Economic Performance
Why do some rich economies grow faster than others?
January 4, 2011Between 1973 and 2007 the twenty rich nations in the following chart averaged a 2% per year growth rate of per capita GDP. But some of them grew faster than others.
Why?
One reason is “catch-up”: partly because they could borrow technology from the leaders, countries that began with a lower per capita GDP tended to grow more rapidly. The growth rates shown here adjust for this.
What else matters? The list of hypothesized causes is lengthy. It includes investment, consumption, education, natural resources, macroeconomic policy, levels of taxation, welfare state size and structure, industrial policy, government regulations, the distribution of income, interest group organization, corporatist concertation, the partisan complexion of government, interest group-government coherence, cooperation-promoting institutions, and institutional coherence, among others.
In a chapter in the Oxford Handbook of Comparative Institutional Analysis, I take a stab at assessing the merits of some of these hypotheses. Many turn out to be of little use in understanding the cross-country variation in catchup-adjusted growth. Two that do seem to help are business and labor participation in policy making (“corporatism”) and limited product and labor market regulations, yet these go only a small part of the way toward accounting for the country differences.
An interesting element of the story is the tendency of countries that do well for a while to then lapse. During the course of these four decades an array of national models have gone in and out of fashion, first performing effectively and then falling on hard times: Germany (“modell Deutschland”) and Japan (“Japan Inc.”) in the 1970s and 1980s; the United States in the 1980s and 1990s; the Netherlands (“Dutch miracle”) in the 1990s; Denmark (“flexicurity”) and Ireland (“Celtic tiger”) in the 1990s and 2000s. Some later rebound, such as Sweden in the 2000s.
My conclusion: we know far less than we’d like to about this very important issue.
Has rising inequality been bad for the poor?
December 14, 2010Income inequality has risen sharply in the United States and some other affluent countries since late 1970s, with much of the increase consisting of growing separation between the top 1% and the rest of the population.
Has this been bad for the incomes of the poor?
In a relative sense, the answer is yes, at least in the United States. According to the best available U.S. data, from the Congressional Budget Office, the share of income going to households at the bottom has decreased.
What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality. (For more detail, see my piece in the November-December issue of Challenge.)
In some countries with little or no rise in income inequality, such as Sweden, government transfers increased and so did the incomes of poor households. In others, such as Germany, transfers and the incomes of low-end households did not increase.
Among nations with sharp increases in top-heavy inequality, we observe a similar disjunction. Here the U.S. and the U.K. offer an especially revealing contrast. The top 1%’s income share soared in both countries, and through the mid-1990s poor households made little progress, as the following chart shows. But over the next decade low-end American households advanced only slightly, whereas their British counterparts experienced sizable gains. The New Labour governments under Tony Blair and Gordon Brown increased benefits and/or reduced taxes for low earners, single parents, and pensioners. As Jane Waldfogel documents in her book Britain’s War on Poverty, these were big policy shifts, even if not always high-profile ones. They produced a significant rise in the real disposable incomes of poor households.
Rising income inequality has a number of potential consequences — some of them, perhaps many, undesirable. Its apparent lack of impact on the absolute incomes of the poor over the past generation ought not lead us to overlook this. Still, it is noteworthy that some affluent countries have managed to engineer income growth for low-end households despite a significant top-heavy rise in inequality. For American policy makers, that might serve as welcome inspiration.
“I heard in your Kant a little Rousseau”
December 4, 2010France is a complex and puzzling country, but I agree with Simon Kuper that we tend to underappreciate the fact that it gets some very important things right.
Poverty and immigration in the U.S. and abroad
November 29, 2010The incomes of American households at the low end of the distribution aren’t especially high, and haven’t increased much, when compared to those of their counterparts in other rich nations. But perhaps this is an unfair comparison. After all, hasn’t the United States absorbed a much larger flow of immigrants than any other affluent country?
Actually, as the following chart shows, we’re not exceptional in this regard.
Does the U.S. have more of the type of immigrants most likely to struggle in the labor market — those with limited education? Again no. As this next chart indicates, here too we’re in the middle of the pack.
When is economic growth good for the poor?
November 17, 2010In a good society, the living standards of the least well-off rise over time.
One way to achieve that is rising redistribution: government steadily increases the share of the economy (the GDP) that it transfers to poor households. But there is a limit to this strategy. If the pie doesn’t increase in size, a country can redistribute until everyone has an equal slice but then no further improvement in incomes will be possible. For the absolute incomes of the poor to rise, we need economic growth.
We also need that growth to trickle down to the poor. Does it?
The following charts show what happened in the United States and Sweden from the late 1970s to the mid 2000s. On the vertical axes is the income of households at the tenth percentile of the distribution — near, though not quite at, the bottom. On the horizontal axes is GDP per capita. The data points are years for which there are cross-nationally comparable household income data.
Both countries enjoyed significant economic growth. But in the U.S. the incomes of low-end households didn’t improve much, apart from a brief period in the late 1990s. In Sweden growth was much more helpful to the poor.
In Austria, Belgium, Denmark, Finland, France, Ireland, the Netherlands, Norway, Spain, and the United Kingdom, the pattern during these years resembles Sweden’s. In Australia, Canada, Germany, Italy, and Switzerland it looks more like the American one. (More graphs here.)
What accounts for this difference in the degree to which economic growth has boosted the incomes of the poor? We usually think of trickle down as a process of rising earnings, via more work hours and higher wages. But in almost all of these countries (Ireland and the Netherlands are exceptions) the earnings of low-end households increased little, if at all, over time. Instead, as the next chart shows, it is increases in net government transfers — transfers received minus taxes paid — that tended to drive increases in incomes.
None of these countries significantly increased the share of GDP going to government transfers. What happened is that some nations did more than others to pass the fruits of economic growth on to the poor.
Trickle down via transfers occurs in various ways. In some countries pensions, unemployment compensation, and related benefits are indexed to average wages, so they tend to rise automatically as the economy grows. Increases in other transfers, such as social assistance, require periodic policy updates. The same is true of tax reductions for low-income households.
Should we bemoan the fact that employment and earnings aren’t the key trickle-down mechanism? No. At higher points in the income distribution they do play more of a role. But for the bottom ten percent there are limits to what employment can accomplish. Some people have psychological, cognitive, or physical conditions that limit their earnings capability. Others are constrained by family circumstances. At any given point in time some will be out of work due to structural or cyclical unemployment. And in all rich countries a large and growing number of households are headed by retirees.
Income isn’t a perfect measure of the material well-being of low-end households. We need to supplement it with information on actual living conditions, and researchers and governments now routinely collect such data. Unfortunately, they aren’t available far enough back in time to give us a reliable comparative picture of changes. For that, income remains our best guide. What the income data tell us is that the United States has done less well by its poor than many other affluent nations, because we have failed to keep government supports for the least well-off rising in sync with our GDP.
The politics of helping the poor
July 1, 2010Slides from my talk at the Luxembourg Income Study conference on “Inequality and the Middle Class.”
The conference papers are available online.
Social spending and poverty
June 7, 2010It’s commonly thought that a market-liberal political economy is best for the rich while a social-democratic one is best for the poor. Some recent research suggests reason to question this. Analyses by Willem Adema of the OECD, by Adema and Maxime Ladaique, and by Price Fishback conclude that the quantity of social expenditures in the United States is similar to or greater than in Denmark and Sweden, two nations long considered large-welfare-state exemplars.*
How so? Government social transfers account for a much larger share of GDP in Sweden and Denmark. But the U.S. government distributes more benefits in the form of tax breaks rather than transfers than do the two Nordic countries; Denmark and Sweden tax back a larger portion of public transfers than the United States does; private social expenditures, such as those on employment-based health insurance and pensions, are greater in the U.S.; and America’s per capita GDP is larger.
The standard indicator of social policy effort is gross public social expenditures as a percentage of GDP. Denmark and Sweden are much higher than the United States on this measure.
Now shift to net (rather than gross) public and private (rather than public alone) expenditures per person (rather than as a percentage of GDP, with purchasing power parities used to convert Danish and Swedish kroner into U.S. dollars). According to the calculations by Adema and Ladaique (Fishback’s are similar), we get a very different picture. By this measure the U.S. is the biggest spender.
This looks like good news for the poor in the United States. Is it? Unfortunately, no. These adjustments change the story with respect to the aggregate quantity of resources spent on social protection in the three countries, but they have limited bearing on redistribution and on the living standards of the poor.
Begin with tax breaks. Researchers count as “social” those designed to provide support in circumstances that adversely affect people’s well-being. In the United States these disproportionately go to the affluent and the middle class. The chief ones are tax advantages for employer and employee contributions to private health insurance and private pensions. These do little to help people at the low end of the distribution, who often work for employers that don’t provide health or retirement benefits. One valuable tax benefit for low-income households is the Earned Income Tax Credit (EITC), but it is already included in the standard OECD data on government social expenditures. Another is the child tax credit, but it is non-refundable and so of limited value to low-income households, many of whom don’t owe any federal income tax.
Next consider tax “clawbacks” in the Nordic countries. Public transfer programs in Denmark and Sweden tend to be “universal” in design: a large share of the population is eligible for the benefit. This is thought to boost public support for such programs. But it renders them very expensive. To make them more affordable, the government claws back some of the benefit by taxing it as though it were regular income. All countries do this, including the United States, but the Nordic countries do it more extensively. Does that hurt their poor? Very little. The tax rates tend to increase with household income, so much of the tax clawback hits middle- and upper-income households.
What’s the impact of private social spending? In the U.S. this accounts for roughly two-fifths of all social expenditures. It consists mainly of employer contributions to health insurance and employment-based pension benefits. Here too the picture changes a great deal on average, but not much for the poor. Employer-based health insurance and pension plans reach few low-income households.
So how well-off are the poor in the United States, with its “hidden welfare state,” compared to social-democratic Denmark and Sweden? One measure is average posttransfer-posttax (“disposable”) income among households in the bottom decile of the income distribution. Here are my calculations using the best available comparative data, from the Luxembourg Income Study (LIS). (The numbers are adjusted for household size. They refer to a household with a single adult. For a family of four, multiply by two.)
This is a pretty big difference, not in America’s favor.
In his paper, Fishback cites similar numbers from the OECD. He cautions, though, that “One advantage the poor Americans would have had in spending their disposable income is that they face consumption tax rates in the 4 to 7 percent range, while consumption taxes in the Nordic countries are above 20 percent.” Actually, consumption tax rates are incorporated in the purchasing power parities (PPPs) used to convert incomes to a common currency, so these income figures already adjust for differences in consumption taxes.
What’s the source of this cross-country difference in the incomes of low-end households? It’s entirely a function of government transfers. Again using the LIS data, I’ve calculated mid-2000s averages for households in the bottom income decile for the three chief sources of household income: earnings, net government transfers (transfers received minus taxes paid), and “other” income (money from family or friends, alimony, etc.). Average earnings are virtually identical across the three countries, at about $2,500. The same is true for “other” income, which averages around $500 in each of the three. Where bottom-decile Danish and Swedish households fare much better than their American counterparts is in net government transfers:
Fishback rightly points to one other key difference between these countries: “Public services not counted in disposable income, like health care and education, likely are better for the very poor in the Nordic countries than in the United States.” It’s difficult to measure the impact of services on living standards with any precision. One indirect way to assess their effect is to switch from income to material deprivation. Two OECD researchers, Romina Boarini and Marco Mira d’Ercole, have compiled material deprivation data from surveys in various rich nations as of the mid-2000s. Each of the surveys asked identical or very similar questions about seven indicators of material hardship: inability to adequately heat one’s home, constrained food choices, overcrowding, poor environmental conditions (e.g., noise, pollution), arrears in payment of utility bills, arrears in mortgage or rent payment, and difficulty in making ends meet. Boarini and Mira d’Ercole create a summary measure of deprivation by averaging, for each country, the shares of the population reporting deprivation on questions in each of these seven areas.
Government services — medical care, child care, housing, transportation, and so on — reduce material hardship directly. They also free up income to be spent on other needs. The comparative data, though by no means perfect, are consistent with the hypothesis that public services help the poor more in the Nordic countries than in the United States. The gap between the countries in material deprivation is larger than in low-end incomes.
Helping the poor is not, of course, the only thing we want from social spending. But it surely is one thing. The United States spends more money on social protection than is often thought, yet that spending doesn’t do nearly as much to help America’s poor as we might like.
For those interested, I’m finishing up a book manuscript that looks at this issue and related ones in more detail.
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* Related research: Adema, Garfinkel-Rainwater-Smeeding, Hacker, Howard. Blog commentary: Fishback, Salam, Schulz, Wilkinson, Yglesias.
A not-so-great day for soccer fans
May 31, 2010Today came the official announcement that José Mourinho will take over as coach of Real Madrid. Given Mourinho’s record of success in winning domestic league and Champions League trophies, I presume this comes as good news to many Real fans. But as a soccer spectator, I’m not especially happy about it.
Real has two of the best attacking players in the world in Cristiano Ronaldo and Kaka, and a strong nucleus around them. This year’s Real team played with an attacking style that was fun to watch. In Spanish league competition it scored far more goals than its recent predecessors.
I suspect this will change under Mourinho. His preferred style is counterattack. That’s how his Inter Milan teams of the past two years have played, and it’s the way his Chelsea teams of the mid-2000s tended to play, despite their wealth of offensive talent. Mourinho’s Chelsea did use an offensive-looking 4-3-3 formation. But a team’s formation matters less than its strategy on the field, and the main thing Mourinho added to Chelsea when he arrived in 2004-05 was a defensive-minded counterattacking style. The club’s goal record bears this out. Chelsea upped its scoring slightly in the first two of Mourinho’s three seasons, but its chief improvement was in allowing fewer goals.
Real Madrid were successful this year, but not successful enough. Their record in the Spanish league was one of the best ever: 31 wins, 3 draws, 4 losses. Yet they finished second to Barcelona. In the Champions League, Real slipped up in the round of 16. Mourinho has been brought in to do better. And he might. Make no mistake: counterattack can be an effective strategy. It’s no accident that the Italian national team, a consistent practitioner, has won two of the last seven World Cups, reaching the semifinals two other times. And the only teams to fare well against Barcelona in the Champions League the past three years — Manchester United in 2008, Chelsea in 2009, Inter Milan this year — did so via a cautious, defensive approach.
As a spectator, though, I much prefer teams willing to play genuinely attacking soccer. This year’s Chelsea team, for instance, was more enjoyable to watch than its Mourinho-era counterparts, with many of the same players.
Few teams have the talent to thrive with an attacking style. The current Real squad is one that does. It would be a pity to waste it. Perhaps at Real Mourinho will change his stripes, but I’m not optimistic.
America and the world
May 13, 2010Lecture slides for the “America and the World” section of my Social Issues in America course:
Why does England lose?
December 27, 2009Soccernomics (U.K. title: Why England Lose) is an attempt by Simon Kuper, a sports journalist, and Stefan Szymanski, a sports economist, to understand the world’s most popular sport based on data rather than lore and cliché. If you’re partial to soccer or interested in sports analysis, it’s a good read. Among the book’s many interesting findings and arguments: soccer fans don’t like equality among teams; the best club teams currently reside in midsize industrial cities such as Manchester, Barcelona, and Turin, but domination likely will shift to postindustrial multicultural giants like London, Paris, Istanbul, and Moscow; soccer will succeed in the U.S. and the U.S. will succeed in soccer irrespective of how the Major Soccer League (MLS) fares; poverty does not make people or countries better at soccer.
The book’s lead chapter tries to answer the question “Why does England lose?” Why has England’s national team fared so poorly in the quadrennial World Cup since its one and only triumph in 1966? This is, the authors note, “perhaps the greatest question in English sports.”
England has a rich soccer history. It is one of only seven countries to have won a World Cup. It ranks fifth all-time in World Cup matches played (55) and wins (25). Its club teams have been highly successful; between 1970 and 2006 an English team won the world’s top club competition, Europe’s Champions League, nine times, which compares favorably to Germany (6), Italy (6), the Netherlands (6), and Spain (5). Yet England won none of the ten World Cups played during that span. Indeed, it never reached the finals, and made it to the semifinals only once. Why?
Kuper and Szymanski begin by dismissing the popular notion that the problem lies in English clubs’ overreliance on foreign players, which supposedly hinders the development of native talent. I agree with their skepticism here. Then they show that a large share of England’s national team players are from working-class households, and they suggest it would be good if more were recruited from the middle class. But they don’t look to see if other more successful countries have done that. They then say England has suffered from being outside the continental European soccer knowledge network. As a result, while other leading European national teams shifted to a rapid short passing game, English soccer remained wedded to a “kick-and-rush” style. But they don’t address the obvious question of why, if the kick-and-rush style contributed to failure in the World Cup, it yielded such success at the club level during the same period.
Ultimately, Kuper and Szymanski assert that the question “Why does England lose?” is wrongheaded, for England’s national team actually hasn’t performed too badly. Here they turn away from World Cup results and look at goal difference in all games played by the national team. They examine all countries’ national teams over the period 1980 to 2001 and discover that GDP per capita, population, and number of matches played since 1872 are helpful predictors. They find that England’s team has done, relative to what this formula predicts, about as well as those of Germany, Italy, Argentina, and France.
Yet here the authors are, I think, trying to be a bit too clever. England truly has underperformed in the past ten World Cups. Kuper and Szymanski note that “Any mathematician would say it’s absurd to expect England to win the World Cup … random factors play an outsize role in determining the winner.” Okay, fair enough. So let’s use getting to the semifinals as the benchmark. Over the past four decades eight nations have dominated world soccer: Argentina, Brazil, England, France, Germany, Italy, the Netherlands, and Spain. The following chart shows how these countries have fared in reaching the World Cup semis since 1970. England’s record is second-worst.
How well should England have done? We can predict these countries’ recent World Cup success pretty well by looking at their historical performance. The following chart plots the number of semifinals reached in the ten World Cups since 1970 by each country’s World Cup match wins over the entire history of the tournament, from 1930 to 2006. Given its overall number of match victories, England ought to have reached the semifinals three times since 1970, rather than just once.
What accounts for England’s poor results? I think it’s a fairly simple story. First, it helps to host the World Cup tournament. These countries have hosted six of the past ten, and in five of those six instances the host made it to the semifinals or beyond: Germany in 1974 and 2006, Argentina in 1978, Italy in 1990, and France in 1998. (Only Spain in 1982 failed.) England didn’t host any. Second, you need to do okay — not great, but okay — in matches decided on penalty kicks. Penalty kick shootouts have been used in the World Cup since 1982. In the seven tournaments from 1982 to 2006, England was eliminated on penalty kicks three times, with not a single penalty-kick win. In contrast, Germany is 4-0 in penalty-kick shootouts, Argentina is 3-1, Brazil is 2-1, and France is 2-2. Only Italy, at 1-3, rivals England’s record of futility in World Cup penalty-kick matches.
Had it hosted one of the past ten World Cups and won a penalty-kick shootout in either 1998 or 2006, England’s semifinals appearances might well have jumped from one to three, putting it right at the expected number.
Understanding France
October 5, 2009It’s been a while since I’ve posted anything here. I’ve been busy working on a book, among other things. I’ll try to get back to it soon.
In the meantime, Saturday’s Financial Times had two nice pieces on France:
The myth of Eurabia, by Simon Kuper
Vive la différence, by Donald Morrison
