Evaluating Spanish pension expenditure under alternativa reform scenario

In this paper we evaluate the quantitative impact that a number ofalternative reform scenarios may have on the total expenditure for publicpensions in Spain. Our quantitative findings can be summarized in twosentences. For all the reforms considered, the financial impact of themechanical effect (change in benefits) is order of magnitudes larger thanthe behavioral impact or change in behavior. For the two Spanish reforms,we find once again that their effect on the outstanding liability of theSpanish Social Security System is essentially negligible: neither themechanical nor the behavioral effects amount to much for the 1997 reform,and amount to very little for the 2002 amendment.

The macroeconomic effects of German unification: Real adjustments and the welfare state

We study the effects of German unification in a model with capital accumulation, skill differences and a welfare state. We argue that this event is similar to a mass migration of low-skilled agents holding no capital into a foreign country. Absent a welfare state, we observe an investment boom, depressed output and employment conditions. Capital owners and high-skilled agents are willing to give up to 4% of per-capita consumption to favor unification. When a welfare state exists the investment boom disappears and the recession is prolonged. Now, with unification, capital owners and high-skilled agents lose 4% of per-capita consumption.

The survival of the welfare state

This paper provides an analytical characterization of Markov perfectequilibria in a politico-economic model with repeated voting, whereagents vote over distortionary income redistribution. The key featureof the theory is that the future constituency of redistributive policiesdepends positively on the current level of redistribution, since thisaffects both private investments and the future distribution of voters.Agents vote rationally and fullly anticipate the effects of their politicalchoice on both private incentives and future voting outcomes. The modelfeatures multiple equilibria. In "pro-welfare" equilibria, both welfarestate policies and their effects on distribution persist forever. In"anti-welfare equilibria", even a majority of beneficiaries ofredistributive policies vote strategically so as to induce the formationof a future majority that will vote for zero redistribution.

Crossing the Rio Grande: Migrations, business cycles and the welfare state

In this paper we study the macroeconomic effects of an inflow oflow-skilled workers into an economy where there is capital accumulation and two types of agents. We find that there are substantial dynamic effects following unexpected migrations with adjustments that resemble those triggered by a sudden disruption of the capital stock. We look at the interrelations between these dynamic effects and three different fiscal systems for the redistribution of income and find that these schemes can change the dynamics and lead to prolonged periods of adjustments. Theaggregate welfare implications are sensitive to the welfare system: while there are welfare gains without redistribution, these gains may be turned into costs when the state engages in redistribution.

Assesing the political viability of labour market reform: The case of employment protection

We analyze the political support for employment protection legislation.Unlike my previous work on the same topic, this paper pays a lot ofattention to the role of obsolescence in the growth process.In voting in favour of employment protection, incumbent employeestrade off lower living standards (because employment protectionmaintains workers in less productive activities) against longer jobduration. The support for employment protection will then depend onthe value of the latter relative to the cost of the former. Wehighlight two key deeterminants of this trade-off: first, the workers'bargaining power, second, the economy's growth rate-more preciselyits rate of creative destruction.

Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets

We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusuallylong unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers'aggregate consumption, and most of the welfare cost of business cycles.

A measure of rationality and welfare

There is evidence showing that individual behavior often deviates fromthe classical principle of maximization. This evidence raises at least two importantquestions: (i) how severe the deviations are and (ii) which method is the best forextracting relevant information from choice behavior for the purposes of welfare analysis.In this paper we address these two questions by identifying from a foundationalanalysis a new measure of the rationality of individuals that enables the analysis ofindividual welfare in potentially inconsistent subjects, all based on standard revealedpreference data. We call such measure minimal index.

Immigration and the survival of the welfare state

This paper analyzes the political sustainability of the welfare state in a model where immigration policy is also endogenous. In the model, the skills of the native population are affected by immigration and skill accumulation. Moreover, immigrants affect future policies, once they gain the right to vote. The main finding is that the long-run survival of redistributive policies is linked to an immigration policy specifying both skill and quantity restrictions. In particular, in steady state the unskilled majority admits a limited inflow of unskilled immigrants in order to offset growth in the fraction of skilled voters and maintain a high degree of income redistribution.Interestingly, equilibrium immigration policy shifts from unrestricted skilled immigration,when the country is skill-scarce, to restricted unskilled immigration, as the fraction of native skilled workers increases. The analysis also suggests a new set of variables that may help explain international differences in immigration restrictions.

Resistance to reform: Reconsidering the role of individual-specific uncertainty

Individual-specific uncertainty may increase the chances of reform beingenacted and sustained. Reform may be more likely to be enacted because amajority of agents might end up losing little from reform and a minoritygaining a lot. Under certainty, reform would therefore be rejected, butit may be enacted with uncertainty because those who end up losing believethat they might be among the winners. Reform may be more likely to besustained because, in a realistic setting, reform will increase theincentives of agents to move into those economic activities that benefit.Agents who respond to these incentives will vote to sustain reform infuture elections, even if they would have rejected reform under certainty.These points are made using the trade-model of Fernandez and Rodrik (AER,1991).

The impact of firing costs on turnover and unemployment: Evidence from the Colombian labour market reform

Reductions in firing costs are often advocated as a way of increasingthe dynamism of labour markets in both developed and less developed countries. Evidence from Europe and the U.S. on the impact of firing costs has, however, been mixed. Moreover, legislative changes both in Europe and the U.S. have been limited. This paper, instead, examines the impact of the Colombian Labour Market Reform of 1990, which substantially reduced dismissal costs. I estimate the incidence of a reduction in firing costs on worker turnover by exploiting the temporal change in the Colombian labour legislation as well as the variability in coverage between formal and informal sector workers. Using a grouping estimator to control for common aggregate shocks and selection, I find that the exit hazard rates into and out of unemployment increased after the reform by over 1% for formal workers (covered by the legislation) relative to informal workers (uncovered). The increase of the hazards implies a net decrease in unemployment of a third of a percentage point, which accounts for about one quarter of the fall in unemployment during the period of study.

Markups, gaps and the welfare costs of business fluctuations

In this paper we present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household s consumption/leisure tradeoff. We show that this indicator corresponds to the inverse of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxilliary assumptions our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent the flexible price equilibrium is distorted,the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the coefficient of relative risk aversion, and steady state distortions.

How "Doing Business" jeopardizes institutional reform

Simplifying business formalization and eliminating outdated formalities is often a good way of improving the institutional environment for firms. Unfortunately, the World Bank s "Doing Business" project is harming such policies by promoting a reform agenda that gives them priority even in countries lacking functional business registers, so that the reformed registers keep producing valueless information, but faster. Its methodology also promotes biased measurements that impede proper consideration of the essential tradeoffs in the design of formalization institutions. If "Doing Business" is to stop jeopardizing its true objectives and contribute positively to scientific progress, institutional reform and economic development, then its aims, governance and methodology need to change.

Single mothers and incentives to work: The French experience

This paper analyzes the effect of the 1998 reform of the French single parents allowanceon the labor supply of single mothers with very young children. The reform aimed atencouraging participation by allowing eligible single parents to accumulate benefits andlabor earnings for a limited period of time. Using data from the French EmploymentSurvey, the analysis shows that single mothers affected by the reform had experienced asignificant increase in their employment rate four years after the reform wasimplemented. During the same period, the employment rate of married mothers withyoung children did not experience a significant change, suggesting that at least part ofthe increase was a consequence of the reform. These results provide some evidence thatbenefit schedules that provide financial incentives to work can have significant effectsin getting single moms back to work, even in the presence of very young children.

Hypothesis on immigration and welfare

The number of hypothesis trying to explain which are the reasons behind the decision to migrate to work into a developed country are diverse and at the same time, difficult to test due to the multiplicity of factors which affect it. This papers attempts to move forward trying to disentangle which are the socio-economic factors that explain the differences in the figures of immigrants in the OECD countries. We show empirical evidence about the determinants of the migratory flows to 17 OECD countries from 65 countries in the 1980-2000 period. Our results reveal the importance to differentiate the inflows composition by at least income in the origin countries. Thus, regarding inflows from non-high-income countries, the results suggest that there is a pull effect from monetary and not real income, and then, the welfare magnets hypothesis should be rejected. This group reacts more to the migratory policy than the inflows coming from high-income countries, although those policies designed to slow down the inflows have not been able, in the aggregate, to reduce them.

Will EMU increase eurosclerosis?

In this paper we study the relationship between labor market institutions and monetary policy. We use a simple macroeconomic framework to show how optimal monetary policy rules depend on labor institutions (labor adjustment costs, and nominal and real wage rigitidy) and social preferences regarding inflation, employment, and real wages. We also calibrate our model tocompute how the change in social welfare brought about by giving up monetary policy as a result of joining the Economic and Monetary Union (EMU) depends on institutions and preferences. We then use the calibrated model to analyze how EMU affects the incentives for labor market reform, both for reformsthat increase the economy's adjustment potential and for those that affect the long-run unemployment rate.