Yes, Germans do believe in fiscal flexibility

Klaus F. Zimmermann Direktor IZA

Klaus F. Zimmermann

Investors were spooked recently by suggestions that global growth may be slowing. Germany came in for particular attention as industrial production and exports both fell, warning that a recession may be on the way. World leaders, especially in Europe, are once again claiming that salvation can come only when Germany finally abandons its rigorous fiscal austerity and launches a Keynesian spending binge. This is preposterous.

To start, Germany’s current fiscal posture isn’t austere. “Austerity” suggests a pro-cyclical cutting of public expenditures amid a profound economic crisis, typically to undo the distortions of previous spending binges. Germany has not practiced this at home, in its early-2000s reform period or after the 2008 global financial crisis. Nor has Berlin advocated such policies for its European partners since then. Even in the case of Greece, Germany was among those advocating aggressive fiscal stabilization to avoid a broader eurozone crisis, but the emphasis is now on making that country competitive by moderating labor costs and emphasizing innovation.

The German economy may be slowing down for a number of reasons, but none of them have been caused by austerity. The dominant factor is declining external demand. Global economic growth, and especially the growth prospects in the eurozone, have become problematic. Meanwhile, a number of international conflicts in countries such as Iraq, Syria and Ukraine have had a negative impact on Germany’s export-oriented economy.

moneycalculatorBut spending cuts for their own sake have never been Germany’s way. Government expenditures grew moderately through the early 2000s. After the crisis, they increased substantially even though the labor market had hardly been affected thanks to automatic stabilizers built into the tax and transfer system.

Instead of austerity, Germany’s economic philosophy, in the government and private sectors alike, focuses on fiscal prudence. German policy makers and voters generally believe that increasing debt levels, just because politicians are unable to convince their constituents of the need for long-overdue reforms, for instance, is not a solution. Continue reading

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Why aging and working makes us happy – in four charts

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Carol Graham, Milena Nikolova

By Carol Graham and Milena Nikolova

In the past few years, economists and other social scientists have made great strides in developing measures to assess subjective well-being (or, more colloquially, happiness), which has deepened our understanding of well-being beyond the traditional income dimensions. There are remarkably consistent patterns in the determinants of subjective well-being across people within and across countries and cultures around the world. One of the most striking of these is the relationship between age and happiness (which is good news for those of us who are already on the “back-nine”). There is a U-shaped curve, with the low point in happiness being at roughly age 40 around  the world, with some modest differences across countries. It seems that our veneration of (or for some of us, nostalgia, for)  youth as the happiest times of our lives is overblown, the middle age years are, well, as expected, and then things get better as we age, as long as we are reasonably healthy (age-adjusted) and in a stable partnership.

happiness_fig1There are other consistent patterns. Income matters to individual happiness in every context we have studied this relationship. Yet after basic needs are met, other things like how your income compares to that of your peers also start to matter. Moreover, married people (and those in a civil union) are typically happier than their non-married counterparts (there is a direction-of-causality-issue here, though, as happier people are more likely to marry each other); healthier people are happier; and women are, in most places, happier than men (as long as gender rights are not severely compromised).

happiness_fig2Another variable that is absolutely critical for subjective well-being is employment status. The unemployed are less happy than the employed worldwide. And both psychologists and economists find that long-term unemployment has psychological scarring effects. Long-term unemployment and under-employment, and the youth’s delayed entrance into employment, coupled with the over-burdened pension systems, are major problems in the U.S. and Europe. At a time when these issues have risen to the fore, it is perhaps worth considering more flexible labor market arrangements. While several solutions have been proposed, we are left wondering whether there would be public receptivity to changing labor market arrangements. While this is hard to predict, what we can measure – and did in our recent article in the IZA Journal of European Labor Studies – is the well-being costs and benefits of different work arrangements. As we argue in the study, different employment and retirement arrangements may be appropriate for people at different stages of their lives, depending on their career goals or innate well-being levels. Understanding how employment, retirement, and late-life work relate to well-being can contribute to ongoing public policy discussions. Continue reading

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Immigrant women: Not just secondary workers any more

flag-220040_1280Immigrant women in the labor market have long been viewed as “secondary workers” who work in unskilled jobs, mainly as a response to family needs and to support their husbands’ skills upgrading. As household financial constraints ease with men’s assimilation in their destination country, women’s labor market participation is expected to drop again. An IZA paper by Alícia Adserà and Ana Ferrer on immigrant women in Canada finds that this is no longer true.

The authors combine data of over 800,000 women in Canada for the period 1991 to 2006 with information on the skill requirements of the jobs women hold (such as physical strength or analytical abilities) to examine the labor market patterns of immigrant women. They show that the recent behavior of married immigrant women does not fit the profile of secondary workers, but rather conforms to the recent patterns of native Canadian wives, with rising participation in the labor market and wage gains as they stay longer in Canada.

Immigrant women’s  behavior displays a path of assimilation similar to that of immigrant men. They increasingly make labor supply decisions guided by their own opportunities in the labor market rather than by their husbands’ trajectories. At best, only uneducated immigrant women in jobs requiring very basic skills may fit the profile of secondary workers with slow skill mobility and low-status job-traps.

Read abstract or download complete paper (PDF).

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Solomon Polachek on equal pay and the gender wage gap

In a video interview, IZA Fellow Solomon Polachek (State University of New York at Binghamton) talks about equal pay and the gender wage gap.

He explains that equal pay policies based on wage outcomes have had little effect on the gender wage gap. Instead, economic policies that promote human capital accumulation and greater lifetime work for women – e.g. subsidizing day care and abolishing marriage taxes – can successfully reduce the gender wage gap further.


 

For more information on equal pay and the gender wage gap see a related article by Solomon Polachek entitled Equal pay legislation and the gender wage gap, which has been published on IZA World of Labor.

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TTIP: Think in The Interest of the People!

ttipIn the world of global commerce, two insights stand out: First, the global trading system badly needs a shot in the arm, all the more so as the World Trade Organization’s (WTO) so-called Bali round, agreed to in December 2013, has run into trouble. And second, at a time when it is increasingly difficult to arrive at growth-enhancing global agreements, regional agreements rise in importance as an alternate route for progress on trade liberalization.

The launch of the new Transatlantic Trade and Investment Partnership (TTIP), announced in June 2013, represents a promising step in that direction. But even though governments and business organizations were keen to get going, the negotiating process had not even started in full when the bickering about what’s “on the table” and “off the table” was already in full swing.

As a result, the negotiations got bogged down quickly in ever more mind-numbing details. The movement toward an agreement had slowed even before the NSA scandal arose. The latter incident offered some politicians in Europe a platform to call for a timeout on any new trade agreement with the United States.

At the same time, there are those who question the value of any such agreement by arguing that the economic benefits which an eventual transatlantic deal may yield are rather small. They point to the existing intensity of bilateral trade and the extensive presence of US firms in the European market, and vice versa. The worry that lies behind these concerns is that only large corporations would benefit, but not the populations at large.

As a labor economist and someone who has long believed in the vitality of the transatlantic relationship, I can only warn against such thinking. In my view, we are not thinking big enough.

Continue reading

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Where does the gender gap in economics enrolment arise?

female-graduateAlthough women account for 57% of all students at UK universities, the share of female economics students is only about 27%. In a new IZA paper, Mirco Tonin and Jackie Wahba use rich data on university applications to explore the reasons behind the big gender gap in economics enrolment. They also explain why it would be in the interest of society to close this gap.

Economists generally have an influential role in policy making, directly or as academics, consultants or policy analysts. The gender of those making policies matters because males and females tend to have different policy preferences. Also, since economics is one of the subjects associated with relatively high average earnings, lower enrolment by females is a contributing factor behind the gender pay gap.

The study finds no indication that universities discriminate against females when making their offers. As the acceptance rate does not differ between males and females, the enrolment gap is entirely due to low application rates: Only 1.2% of females apply to economics, as opposed to 3.8% of males. An important limiting factor (though not the whole story) seems to be the gender gap in math. Among those who enroll at university, math is an A level subject for 19% of males, but only 10% of females.

There is evidence that this gap in math is cultural rather than “biological”, as the gap disappears in more gender-equal societies. Thus, a policy aimed at reducing the gap in math could be very effective. In particular, it could start a positive loop, with an improvement in the participation of girls to educational paths leading to positions of influence generating more equality in society, again encouraging girls to seek educational paths leading to positions of influence, and so on.

Read abstract or download complete paper (PDF).

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Youth unemployment in Europe: What employers and policy makers can do

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Werner Eichhorst

Youth unemployment has become one of the most pressing and highly discussed issues in Europe in the aftermath of the 2008 recession. However, there is major divergence in youth unemployment rates across European countries with massive increases in Spain, Greece, Italy, Portugal and France. Some Central and Eastern European countries also report unemployment rates of more than one-third, while the situation is mostly stable in Germany, the Netherlands, Austria or Denmark.

However, youth unemployment rates are not the best indicators available, as the active share of the youth labor force varies greatly due to enrollment in upper secondary and tertiary education. Measuring youth exclusion via the NEET rates, i.e. the share of young people not in employment, education or training, shows lower values and more contained increases, but the cross-country divergence is also remarkable.

Cross-national differences highlight the crucial interaction of a macroeconomic shock with the institutional arrangement in place, and in fact youth (un)employment is one of the areas where institutions make a real difference. The recent crisis has once again highlighted the structural problems that already existed in better times. In general, there is a particular vulnerability at the early stage of labor market careers that is typical for young people in many countries. But institutions are crucial in structuring the transition from school or education to work. This holds for:

  • the regulation of employment protection (fixed-term vs. permanent contracts) that tends to create dual labor markets with very limited possibilities of a transition to stable jobs in many Mediterranean countries,
  • minimum wages which can be particularly harmful for young people without particular skills or work experience,
  • vocational training, where dual vocational training and apprenticeships appear superior to general education and purely school-based vocational education as the former combine structured learning with early work experience,
  • active labor market policies to deal with the prevention of (long-term) unemployment such as preparatory training, alternative curricula and subsidized forms of employment that are more or less effective in promoting a sustainable access to the labor market.

Countries with high or rising youth unemployment and NEET rates often lack institutional preconditions for a smooth transition from school to work. Youth-friendly labor markets are either flexible (with a low regulatory gap between permanent and temporary jobs, and moderate minimum wages) and/or they have strong vocational training that the raises attractiveness of labor market entrants to employers due to skills acquisition and work experience combined. Continue reading

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