“Austerity is used as a scapegoat to avoid painful reforms”

Klaus F. Zimmermann IZA Director

Klaus F. Zimmermann
IZA Director

In an interview with La Tercera newspaper in Chile, IZA Director Klaus F. Zimmermann comments on Europe’s economic difficulties and the current debate on austerity and flexibility. He calls on European policymakers to abandon their ideologically motivated policy strategies in favor of evidence-based policymaking. Rather than relying on austerity or demand stimulus alone, they should consider fiscal consolidation and growth-oriented structural labor market reforms as two integral parts of a successful economic package to stimulate the economy. Read the full text of the interview:

La Tercera: France’s former economy minister Arnaud Montebourg criticized austerity as “unnecessarily extending and aggravating the economic crisis.” What is your take on the austerity/flexibility debate in Europe?

Zimmermann: I think that the current debate about austerity and flexibility is not very helpful. The question should not be whether the economic crisis can be tackled most effectively by “left” or “right” policies. Instead, the focus should be on specific policies that do or don’t make sense in the specific context. This should be judged by solid empirical evidence and not by ideological views. When adapting this method of “evidence-based policy making,” it is very likely that a policy mix turns out to be the best strategy. In most cases structural reforms are badly needed, but automatic stabilizers have to be allowed to work – so austerity is not a good strategy in a crisis. Austerity is used as a scapegoat to avoid painful reforms.

Spain has aligned itself with Germany around the issue of austerity. In your view, is Spain getting out of its economic difficulties by sticking to austerity policies? Is that the main difference to Italy, which is again in recession?

Italy is still talking about reforms while Spain has already undertaken some measures and now sees a strong rise in its economic growth. Spain has been heavily hit by the economic crisis and Italy is now facing a triple-dip recession. While even the US economy has grown by 27 percent since 2000, the Italian economy is now at the size it already had in 2000. In contrast, the German economy was remarkably resilient to the Great Recession. The German labor market was hardly affected by the crisis. Hence, Italy and also France are well advised to closely investigate the German model of labor market reforms and, importantly, adapt it to their own country’s needs. In this context, however, it is important to understand that Germany did not follow an austerity model. Instead, it was realized that optimizing the use of public resources to foster growth makes sense only if it is combined with structural labor market reforms.

With Germany’s economy itself slowing down, the euro area in worse shape, and given the deflation risks, do the calls for demand stimulus make sense?

It is certainly true that austerity is not a growth strategy. But similarly, a general demand stimulus is also not a growth strategy. I think that policymakers are well advised – not only in recessions, by the way – to regard fiscal consolidation and growth-oriented structural labor market reforms as two integral parts of a successful economic package to stimulate the economy. Implementing an intelligent combination of these two elements could certainly improve the current shape of the euro area – and also the shape of other economies facing difficulties. The European Union sits on billions of unused money for encouraging investments and fighting youth unemployment. Structural problems like youth unemployment will not be solved just by demand measures.

Where do you think the austerity/flexibility debate will ultimately lead?

I hope that the debate between austerity and flexibility will be soon replaced by a more helpful debate about policies that do make sense or not. The key question is: How do we get the countries under pressure to become more competitive? I thought that the time for ideological views dominating economic policy had already ended. But maybe I was wrong and the era of “evidence-based policy making” is yet to come. In my opinion, this approach would certainly lead to better policies and could increase overall economic welfare.

Posted in Opinions | Tagged , , , , , , , , , , , , , | Leave a comment

Employee performance and the value of the bosses: Video interview with Kathryn Shaw

Employees should ultimately be paid for performance, not for working hours, says Kathryn Shaw (Stanford University and IZA) in a video interview. If hourly wages are paid, that entails choosing high-performing employees carefully. While wage inequality within firms serves to boost performance, equality of opportunity is what really matters, says Shaw.

Her research finds that the performance of bosses has a substantial impact on firm productivity. Ideally, “they train, they motivate, they inspire, they employ,” she says.

Kathryn Shaw is the subject editor for Behavioral and Personnel Economics at the IZA World of Labor.

Posted in Videos | Tagged , , , , , | Leave a comment

Fixed-term contracts: Dead-end jobs or useful stepping stones? Video interview with Werner Eichhorst

Fixed-term contracts have become a major form of employment in Europe. While proponents regard them as an important stepping stone to permanent employment, critics deride them as dead-end jobs. Who is right? That depends on the institutional and economic environment, as Werner Eichhorst explains in a video interview.

Fixed-term contracts can be a pathway from unemployment to employment, but their potential as a stepping stone to permanent employment is undercut if there is a strong degree of segmentation in labor markets. Then the labor flexibility motive of employers ends up dominating the screening function for permanent hires.

To counter the trend toward labor market dualization, Eichhorst suggests that policymakers should narrow the gap between contract types by easing dismissal protection for permanent contracts while at the same time strengthening the employment stability of fixed-term contracts.

For more detailed information, see Werner Eichhorst’s article on Fixed-term contracts in the IZA World of Labor.

Posted in Videos | Tagged , , , , , , | Leave a comment

High mortality on payday: Don’t get too excited about your money!

euro-96593_1920Payday is supposed to be a cause for celebration. When the salary finally arrives, bills can be paid, and financial stress should be eased. But if there is still some money left, be careful how to spend it: As the latest IZA discussion paper shows, too much excitement could be deadly!

In their study, Elvira Andersson, Petter Lundborg and Johan Vikström find an enormous increase in mortality on payday. Analyzing data on Swedish public sector employees – accounting for 22% of the country’s labor force – they discover a 23% increase in total mortality on the day that salary payments arrive.

The effect is especially pronounced for young workers aged 18 to 35. Their mortality rates on payday increase by as much as 164%. Overall, the results are driven by low-income earners, who are more likely to face liquidity constraints, which means that some extra spending money really makes a difference.

But contrary to what one may assume, wild partying on payday is not the reason for this excess mortality. Instead, the extra deaths are caused mainly by circulatory problems due to an increase in “general economic activity” – including shopping, traveling or eating out. When these activities are too exciting (watching your favorite football team) or unhealthy in other ways (greasy food), they lead to a higher risk of heart attacks and strokes.

Since paydays vary among Sweden’s public sector employers, the authors were able to rule out that their results are based on date-specific effects. Moreover, the rise in mortality is not offset by a subsequent decline, so it really consists of additional premature deaths. When extending the findings to include the entire Swedish working-age population, payday seems to cause approximately 96 premature deaths per year.

Read abstract or download discussion paper.

Posted in Research | Tagged , , , , , , , | Leave a comment

Migration decisions of couples: Who wears the pants?

airplanesCouples are less likely than singles, but more likely than families to emigrate to a different country. But who makes the decision to migrate? Does the traditional role model prevail, where the man’s career prospects play the most important role? Or does the migration decision simply depend on the better-educated, higher-earning spouse’s job opportunities?

In a new IZA Discussion Paper Panu Poutvaara, Martin Junge and Martin D. Munk for the first time analyze migration decisions of dual-earner couples distinguishing between couples with male primary earners and couples in which women earned more (which is the case for about 15 percent of the couples). The researchers use register data on the entire Danish population from 1982 to 2010. Every fifth couple in their 20s and 30s decides to leave Denmark at least for a while. In 2010, more than 42,000 couples emigrated.

The authors find that family migration is indeed very responsive to the primary earner’s income  regardless of whether this is the male or the female partner. Each one-percent increase in the earnings of the primary earner increases the likelihood that a couple emigrates for at least 5 years by 1.6 to 3.6 percent. The effect of the secondary earner’s income is small and varies in sign across different groups.

On the other hand, the male’s education plays a bigger role than the female’s education in emigration decisions, independent of which partner earned more in Denmark. Even when the woman earns more, the emigration rate of male power couples (male has college education while female has not) is higher than the emigration rate of female power couples. If both partners went to college, the probability of migrating is six times higher than for couples without a university degree.

Read abstract or download discussion paper.

Posted in Research | Tagged , , , , , , , , | Leave a comment

How recessions produce career criminals

gunRecessions are known to create higher unemployment rates and lower levels of happiness and income. There is also growing evidence that workers who first enter the labor market during economic downturns suffer from poor job matching that impedes their career progression. But recessions have an even more disturbing effect – they contribute to initiating and forming criminal careers.

In a new IZA Discussion Paper Brian Bell, Anna Bindler and Stephen Machin show that young males who leave school in the midst of a recession are much more likely to become criminals than those who graduate in boom times. These effects are long lasting and persistent.

The researchers discover that entering the U.S. labor market at a time of recession – defined as a 5 percentage points higher than normal unemployment rate – results in a 5.5 percent increase in the probability of being incarcerated at some point over the next two decades. This effect, which is mainly driven by high-school dropouts, is similar in magnitude for the UK.

Even a decade after leaving school, there are strong and positive effects from entry unemployment on arrests, particularly for property crime. In the UK the influence on this sort of crime eventually dies out after 15 to 20 years post-school experience while it remains (and becomes even more significant) for violent crime.

Read abstract or download discussion paper.

Posted in Research | Tagged , , , , , , , , | Leave a comment

The state of European integration: What labor market experts think

EuropeRecent developments challenge the idea of free mobility in Europe. The rise in Euroskepticism, the perceived threat of welfare migration or the vote of the Swiss people to reintroduce immigration quotas indicate a degeneration of the European ideals. In light of these concerns, leading labor economists have recently joined forces in calling for an EU Charter that serves as a joint commitment to Working Without Borders.

How serious are these concerns? In a new IZA Discussion Paper, Annabelle Krause, Ulf Rinne and IZA Director Klaus F. Zimmermann find that labor market experts are worried about the state of European labor market integration, too. Although the experts are generally convinced of the merits arising from free labor mobility in Europe, the survey results point at several reasons why these benefits have not yet fully materialized – and why the public has difficulties perceiving them.

For example, the majority of experts are satisfied with the European Union, but a sizable 30% are disappointed. While about two-thirds of the respondents agree that a Single European Labor Market is important for achieving larger economic welfare, the majority thinks that Europe has not yet achieved this goal. Increased labor mobility is crucial to achieving this goal. The rapid recognition of qualifications, the harmonization of social security systems, and the knowledge of several languages are named as the three most important factors to increase labor mobility in Europe. Finally, most experts share a rather pessimistic view regarding the impacts of the Great Recession: They believe that the crisis-induced economic divergence between European countries is a long-lasting phenomenon.

These are some important findings of the IZA Expert Opinion Survey 2014 on the Single European Labor Market conducted earlier this year. The online survey was disseminated among the 700 European members of IZA’s network, which is the largest network of labor economists worldwide comprising more than 1,300 experts from 50 countries.

Read abstract or download discussion paper.

Posted in Research | Comments Off