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1st Ifo BrIEF
Ifo Brussels International Economic Forum
Lisbon:
Bringing the Goalposts Nearer
12 June 2007
Institute
for Economic Research
at the University of Munich
© Ifo Institute for Economic Research at the University of Munich
Publisher:
Ifo Institute
Editors:
Paul Kremmel
Heidemarie C. Sherman
Photography:
Romy Bonitz
Layout and design:
Kinga Bien
Printing:
Majer & Finckh, Stockdorf
Contents
3
Lisbon: Bringing the Goalposts Nearer
4
Introduction
Welcome Addresses
Keynote Address
9
Panel 1
Offshoring, Outsourcing and
the Forces of Globalisation
12
Panel 2
Efficiency and Equity in European Education
and Training Systems as Key Factors in the
Revised Lisbon Strategy
14
Panel 3
Demography, Employment and Social Protection:
The Future of the European Welfare State
17
Appendix
1st Ifo BrIEF 2007
Lisbon:
Bringing the Goalpos t s N e a r e r
T
he Committee of the Regions and the Ifo Institute for Economic Research at the
University of Munich jointly hosted a conference in Brussels on 12 June 2007,
aimed at injecting new thinking and new life into the EU’s Lisbon Strategy. The event,
entitled “Lisbon: Bringing the Goalposts Nearer”, was the first in an annual conference
series called Ifo BrIEF (Brussels International Economic Forum), which seeks to
strengthen input from economic experts in European policy-making and to provide a
platform for prominent decision-makers from the world of European politics to meet with
renowned economists and discuss core questions pertaining to Europe’s future.
Opened by Ifo President Hans-Werner Sinn and Committee of the Regions SecretaryGeneral Gerhard Stahl, the conference included contributions from Joaquín Almunia,
Economic and Monetary Affairs Commissioner, Pervenche Berès, President of the
European Parliament’s Committee on Economic and Monetary Affairs, Odile Quintin,
Director-General for Education and Culture, Nikolaus van der Pas, Director General for
Employment, Social Affairs and Equal Opportunity, Martin Werding, Head of the Social
Policy and Labour Markets Department of the Ifo Institute, and Ludger Woessmann, Head
of the Human Capital and Innovation Department of the Ifo Institute.
The conference focussed on the implications of dramatic changes in the division of labour
brought about by globalisation, the challenges posed by demographic change and the
demands placed by the Lisbon Agenda on Europe’s education policy. Launched by the
European Council in 2000, the Lisbon Strategy aims to make Europe the most competitive
and the most dynamic knowledge-based economy in the world by 2010. A mid-term
review of the policy in 2005 resulted in a sharper focus on two principal tasks – delivering
stronger, lasting growth and creating more and better jobs.
1st Ifo BrIEF 2007
Introduction
1st Ifo BrIEF 2007
Introduction
Welcome Addresses
I
t is a privilege to be here today at the Committee
of Regions to open the first Ifo Brussels
International Economic Forum. The Forum,
jointly organised by the Committee of the Regions
and the Ifo Institute for Economic Research at
the University of Munich, is to be the first of a
new annual conference series. The series has the
aim of strengthening the contribution of Europe’s
economic expertise to European economic policymaking and providing a platform for prominent
decision-makers from the world of European
politics to meet with renowned economists to
discuss key questions pertaining to Europe’s
future.
This inaugural conference will address issues
related to the attainment of the goals set down by
the Lisbon process that aimed at making the EU
“the most dynamic and competitive knowledgebased economy in the world by 2010”. Specifically
the conference will focus on the implications
of the dramatic changes in the global division
of labour brought about by globalisation, the
challenges posed by the ageing populations and
the demands placed by the Lisbon Agenda on
Europe’s education policy.
I am happy to announce that the keynote address
will be held by Joaqin Almunia, Economic and
Monetary Affairs Commissioner. There will be
contributions by Pervenche Berès, President of the
European Parliament’s Committee on Economic
and Monetary Affairs, Odile Quintin, DirectorGeneral for Education and Culture, and Nikolaus
van der Pas, Director-General for Employment,
Social Affairs and Equal Opportunity.
Contributions from the Ifo Institute will be by
Prof. Ludger Woessmann, Head of the Human
Capital and Innovation Department, Dr. Martin
Werding, Head of the Social Policy and Labour
Markets Department and myself.
There will be time for discussion in each of the
three panel sessions, and I look forward to a lively
interchange on all the topics of this conference.
Hans-Werner Sinn
I
t is a great pleasure for me to open this first Ifo
Brussels Economic Forum, organised jointly
by the Ifo Institute for Economic Research in
Munich and the EU Committee of the Regions. It
is a particular pleasure to welcome Commissioner
Almunia, who gracefully accepted the invitation
to give the keynote address today.
The title of this conference, “Lisbon – Bringing
the Goalposts Nearer”, is a topic close to the heart
of the Committee of the Regions, as regions are at
the centre of economic policy decision-making. In
a European Union with an increasingly integrating
market and one single currency, the margin of
manoeuvre for national economic policy decisions
has changed for the member states. That means that
the responsibility for public activity is increasingly
being passed on to the regional level, and most
of the Member States have started a process of
decentralisation, moving to a new federalism.
Innovation, research, training, education as well
as the establishment of economic clusters and the
provision of related infrastructure is ever more
falling upon the shoulders of the regions. More
than 50 percent of public investment in the EU is
already undertaken at the sub-national level. The
regions and cities are the engines of growth in
the European Union. As Jean-Claude Juncker, the
Luxembourg Prime Minister, said when addressing
the Committee of the Region’s plenary session
last week: “Competition in twenty years’ time in
Europe will be competition between regions that
have economic weight. If the integration process
follows a reasonable path, important matters
will be decided and implemented at the regional
level according to the principle of subsidiarity.”
Therefore the Committee of the Regions has
established a Lisbon barometer, together with
participants from 100 regions, which will help
us prepare our contribution to the revised Lisbon
strategy, which is to be discussed at the Spring
European Council 2008. For this reason, we
are very happy to have this debate here at the
Committee of the Regions.
Hans-Werner Sinn
President, Ifo Institute, Munich
Gerhard Stahl
Secretary-General,
Committee of the Regions,
Brussels
Thank you for coming to this first Ifo Brussels
Economic Forum. I too look forward to a lively
discussion and new insights.
Gerhard Stahl
1st Ifo BrIEF 2007
Introduction
Keynote A d d r e s s
The Lisbo n A g e n d a :
Adapting E u r o p e t o a Wo r l d o f C h a n g e
Joaquín Almunia
Commissioner for Economic and Monetar y Affairs,
European Commission, Brussels
Joaquín Almunia
Commissioner for Economic
and Monetary Affairs,
European Commission, Brussels
W
hen the Lisbon Agenda was launched in
2000 it symbolised a clear recognition that
Europe needed major structural reform to succeed
in the modern, global economy. The Agenda aimed
to build on the success and dynamism created in
Europe by the Internal Market and the launch of
Economic and Monetary Union and the euro in the
1990s.
The reform process has made significant steps
forward in recent years. Member States have taken
wide-ranging policy measures in a number of
areas, and the 2005 relaunch gave much needed
momentum to their efforts.
There is growing evidence to suggest that
real structural changes have taken place in
our economies and are now yielding concrete
benefits. One of the best examples is the recent
improvement in the labour markets. The decline
in unemployment has been rapid compared with
previous economic cycles, and employment growth
has been very strong, especially among women and
older workers.
Productivity growth rose to 1.4 percent in 2006.
Compare this to the average rate of only 0.6 percent
between 2001 and 2005, and I think that represents
a sizeable step forward. There is, however,
currently some debate
among policy makers
as to how much
of the rebound in
productivity is purely
cyclical and how much
is related to structural
improvements.
“The Lisbon reforms are working, but
far more remains to be achieved.”
The Commission‘s latest Annual Progress Report
indicates that good progress has been made towards
boosting R&D and innovation, improving regulation
and enhancing the business environment, especially
for SMEs.
Member States have directed their energies towards
fostering competition. They have strengthened
national competition authorities and regulatory
bodies and taken major steps to liberalise network
industries. Many countries have also simplified rules
and increased transparency in public procurement,
enhancing competition.
At the same time, innovation has become a high
priority for all Member States. Private research in
the EU rose by more than 5 percent in 2005, and
for the fourth year in a row, the “innovation gap”
between the US and the EU narrowed.
To complement initiatives to enhance dynamism in
Europe, countries have taken steps to make labour
markets more flexible. Almost all Member States
have taken measures in the field of unemployment
and welfare-related benefits. They have liberalised
employment protection legislation for temporary
contracts, reduced the tax wedge to “make work pay”
and introduced reforms to public pension systems.
1st Ifo BrIEF 2007
Certain features of the current rebound could
indicate that changes of a more structural nature
may have taken place, and a large number of recent
studies document a strong link between productivity
growth and indicators of structural reform.
Introduction
will allow them to change
jobs and support them when
they are in between work.
This will require not only
new policies, but new ways
of thinking about our social
systems and about notions
of security, equality and
welfare provision.
Overall, and in light of the evidence, I am confident
to conclude that Lisbon reforms are working. Yet
despite the progress I have outlined here, far more
remains to be achieved.
Productivity performance can only be described as
poor in some market services, particularly retail and
financial services. This reflects the pressing need
to stimulate competition in services, especially
given that this area now accounts for 70 percent of
modern economic activity. Timely implementation
of the Services Directive will play a key role in
unleashing this potential.
There is also scope for countries to make labour
markets more flexible. For example, benefit systems
in many Member States still create disincentives to
work. And unemployment is still relatively high,
especially among young people. Furthermore,
Member States are still not doing enough to invest
in skills and education.
To be sure, Europe’s systems
of
welfare,
healthcare
and education provision
are among the best in the
world. Since World War II
they have reduced poverty
and inequality and established high standards of
economic well-being on our continent. But that
does not mean that the present size or structure of
the welfare state and labour market regulations in
Europe are the most efficient. Nor does it mean that
we should ignore the weaknesses of the current
systems, weaknesses that have served to limit
productivity, employment and overall growth.
The sustainability of our current social model is
also under pressure from another source. Population
ageing means that expenditure on pensions and
health care will increase just as the reduction of
labour supply will jeopardise our ability to maintain
high economic growth. If policies do not change,
we predict that public expenditure in the EU will
increase by up to 4 percent of GDP by 2050, while
the potential growth rate will almost halve over the
same period.
EU Member States therefore must implement
policies to re-shape the European Social Model in
“We need to rethink our notions of security,
equality and welfare provision.”
Education and lifelong learning, coupled with
flexible skills, are the pre-conditions for higher
productivity and a successful knowledge-driven
economy. For future prosperity we must ensure a
system of high-quality education, starting in early
childhood, so that we have a skilled and innovative
population that can meet the new challenges – and
opportunities – of the 21st century.
a way that will make it sustainable. Such policies
would have to attract and retain people in the labour
market rather than subsidise inactivity. They would
reconsider the concept of equity to provide a real
equality of opportunity. And they would build on
the “flexicurity” model, providing more security
and support in the transition between jobs, rather
than protecting individual jobs.
But the benefits of investment in human capital extend
well beyond the economic sphere. Better education
enhances social cohesion. Employment remains the
best means of tackling social exclusion.
Another means to make our social systems
more sustainable is to improve the quality and
effectiveness of public spending. Rather than
increasing public spending, we should investigate
the viability of redirecting expenditure to growth
enhancing budgetary items. For example,
channelling public money towards items such as
education and R&D can bring valuable social and
economic benefits.
The role of education gains even greater importance
in a globalised economy. The concept of “a job for
life” is losing relevance in today’s labour market.
The social system as a whole must encourage
workers to be adaptable, to give people the skills that
1st Ifo BrIEF 2007
Pa n el s
1st Ifo BrIEF 2007
Panel 1
Offshoring,Outsourc i n g a n d t h e F o r c e s
of Globalisation
H a n s -Werner Sinn
W
ill Europe succeed in reaching its goal
of becoming the most dynamic and
competitive region by 2010? This will be difficult
in light of the adjustments necessitated by the
many countries that have recently joined the market
economy, in particular the ex-communist countries
of eastern Europe. Add China and India and we
now have three times as many people in the labour
markets as before. Never before in peacetime has
there been such a large shock to the world economy,
as seen for example, in the hourly labour costs in
losses for substantial parts of the population. This is
the challenge facing the European welfare model.
Offshoring and outsourcing are two particularly
interesting aspects of structural change. They
have been the two dominant economic trends
since the mid-1990s, especially once it was
clear that the Eastern European countries would
soon be joining the EU. By outsourcing and
offshoring, Western economies can specialize in the
downstream parts of the production chain, leaving
Hans-Werner Sinn
President, Ifo Institute, Munich
“The lowered demand for unskilled labour is a
challenge facing the European welfare model.”
manufacturing. The wage gaps among countries are
enormous. Presently wages in Eastern European
countries are one fifth of West European wages and
one twentieth of China’s. Wage convergence will
come but how fast? Eastern Europe may reach 50
percent convergence by 2030. For China and India,
it will surely take longer.
The forces of convergence include, besides imitation
and the adoption of technological knowledge,
capital flows from the rich to the poor countries,
migration from the poor to the rich countries, and
specialisation processes raising the demand for
high-skilled labour and capital while lowering the
demand for unskilled labour, putting their wages
under downward pressure. There will be winners
and losers. Gains from trade always come with
the upstream parts to low-wage countries. Because
the downstream parts use human capital and real
capital intensively but not much unskilled labour,
the result is a “bazaar economy”: the workbench
is increasingly being shifted to low-wage countries
even though the sales counter stays where it was.
In 1991, 27 percent of the value of a German
export good was in fact previously imported. By
2005 this share had increased to 42 percent. At the
margin the real export content of German exports
was 53 percent: of each additional real euro a
German exporter earned on exports, he needed 53
cents to buy the intermediate imports necessary to
produce these exports. German firms are reducing
their production depth as more and more goods
are channelled through the country relative to the
value added produced in
exports. However, this does
not mean that value added
earned in exports is fading
away, to the contrary!
Although value added per
unit of exports has declined,
the quantity of exports has
increased so much that the
decline in the value-added
content has been more than
compensated.
Has
Germany
reaped
gains from trade? From
a business perspective,
outsourcing and offshoring
are good because they
1st Ifo BrIEF 2007
10
Panel 1
help increase profits, making shareholders happy.
From an economic perspective the picture is less
straightforward because we must also consider the
unemployed. There has not been an improvement
in the division of labour because one million of
the 1.25 million full-time equivalent jobs German
manufacturing lost from 1995 to 2006 have not been
offset by jobs created elsewhere in the economy.
The unemployed are sent to the welfare office,
into early retirement, into job schemes, etc. This is
incompatible with additional gains from trade.
There is a puzzle, however. Germany is the export
champion of the world, but GDP growth has been
miserable. How can we explain this? Is it true, as some
on the left say, that Germany is highly competitive but
domestic demand is too low because the purchasing
power of workers is too low? So higher wages
would result in more consumption which would
drive economic growth? Not really. There are other
explanations that are more supply-side oriented.
First, there is capital deepening. If wages are high
and rigid in the face of low-wage competition from
the ex-communist countries including China, firms
will try to reduce costs by replacing people with
machines. Secondly, there is immigration, but it is
immigration into unemployment because at rigid
wages the immigrants cannot find jobs. Typically,
the immigrants take jobs, and the displaced residents
go on the dole and live on the replacement incomes
offered by the welfare state. Then there are excessive
capital exports. If wages are high, it is more attractive
to shift your capital to other countries and exploit the
low wages there. Capital exports, of course, imply
a huge export surplus. So the current account is
strongly positive, and laymen erroneously talk of
a wonderfully competitive economy. Further, there
is too much horizontal specialisation: As additional
low-wage countries come onto the scene, the labour
intensive
domestic
sector releases skilled
labour, unskilled labour
and capital. These
factors of production
move into the capitalintensive and highskilled sectors that
cannot, however, absorb all the unskilled
labour. The result is
unemployment of the
latter and downward
pressure on their wages.
In a well-functioning
market economy, wages would decline.
This would slow the
structural adjustment.
When wages decline,
1st Ifo BrIEF 2007
not all labour-intensive sectors will have to become
unemployed. Therefore, not all the capital and not all
the skilled workers will have to move to the highskilled, capital-intensive export sectors. The export
sectors will be smaller while the domestic sectors
that need lots of labour will be larger; the economy
will adjust in a smoother more flexible manner. But
when the economy is not flexible and wages are rigid,
structural change will be massive: labour intensive
sectors will shrink and only the high-skilled, capitalintensive export sectors survive, producing too many
exports. The problem is that although these processes
are a sign of an improvement in the division of labour,
they go too far because wages are rigid. Finally, there
will also be too much vertical specialisation: Since
the upstream parts of the production chain also tend
to be more labour intensive, these parts will have
to be given up and the factors of production will
be concentrated on the downstream parts. It is this
vertical specialisation that I call the bazaar effect.
Both, horizontal and vertical specialization generate
exports. This is what an improvement in the division
of labour implies. However, the process is overdrawn
and has a pathological component. Because of wage
rigidity, the effect is larger than it otherwise would
have been. We simultaneously get huge exports,
unemployment and sluggish growth.
The policy implication is that we must make wages
more flexible. Many things are necessary to achieve
this but the most important one is a redesign of
the welfare system. We need to adopt a strategy of
defending minimum incomes by paying people a
subsidy in addition to their wages so that the sum is
sufficient to meet our social goals. Wage subsidies
instead of wage replacement payments – that is
the solution. Germany, with its Agenda 2010, has
taken a small step in this direction and the labour
market may already be seeing some of the fruits.
Panel 1
11
Pe r v e n che Berès
T
he Lisbon strategy is a European programme
for developing the European economy and
society. But it is naive to think that we can achieve
our goals without considering the rest of the world.
Indeed, the originally proclaimed goal of the Lisbon
strategy was to make the EU “the most dynamic
and competitive knowledge-based economy in
the world by 2010”. Thus it is acknowledged that
Europe competes with the rest of the world and that
we want to be the best in the world.
Having said that I would underline that Europe
should take on the competition but without forgetting
its cultural specificities. And one important aspect of
European culture is its social model. But this social
model is under pressure by some aspects of the
current globalisation. Outsourcing and off-shoring
are aspects of this threat and Europe has to be wary
of this phenomenon.
Outsourcing and offshoring
are no new phenomena
and should not be seen in
isolation. They are two
aspects of delocalisation
and as such part and parcel
of globalisation. One of the
most visible signs of the
globalisation process for
the citizens is the closing
of factories in their neighbourhoods as production
is relocated to low-cost countries. That is why
the hostility to globalisation expressed by many
Europeans is so understandable. It reflects fear, fear
of the inevitable.
If we want to be competitive, we have to be efficient,
intelligent, creative and innovative. This requires
active policies in favour of education, it requires
political willingness and courage, it requires public
spending, and a lot of public spending. The logic of
the Lisbon Strategy is the only solution we have.
To promote investment and transform Europe into
an area that can prosper, the environment and social
model are not obstacles but
assets. Investors will choose
Europe for its skilled labour
force, its famous universities,
its quality of life and its social
peace, but also because of its
infrastructure and the public
services offered.
Pervenche Berès
Chairwoman, Committee on
Economic and Monetary Affairs,
European Parliament, Brussels
A proper industrial policy
should be defined to complete
the Lisbon Agenda. We need
to build a knowledge-based
economy, but we need to
be careful that research and
production stay localised within
the EU. Particularly those sectors
are at risk from globalisation
that are more exposed to lowwage international competition and where labour
represents a large share of total costs. A major part of
our initiatives should therefore be aimed at helping the
people who lose their jobs in these sectors in joining
the knowledge-based economy. They must have
access to education and training. This is necessary to
avoid wasting part of the labour force, but also to avoid
social unrest because of growing inequality.
“To be competitive we must be
efficient, intelligent, creative
and innovative.”
To cope with outsourcing and offshoring, Europe
should not engage in a race to the bottom. Less
protection for workers, suppression of minimum
wages, and a total flexibility of only the workforce
cannot be the solution. We cannot save our economy
by destroying our society.
Europe accepts globalisation and the rules of
competition. It does not denounce offshoring and
outsourcing as evils per se. But Europe cannot
be the only player that respects the rules. The EU
must reinforce its global presence to guarantee
a regulation of the forces of globalisation. This
applies in particular to issues of the environment,
tax competition, labour rules and human rights.
1st Ifo BrIEF 2007
12
Panel 2
Efficiency a n d E q u i t y i n E u r o p e a n E d u c ation and Tr a i n i n g S y s t e m s a s Ke y F a c to r s i n
the Revise d L i s b o n S t r a t e g y
Ludger Woessmann
I
want to focus on two main issues:
Ludger Woessmann
Head, Human Capital and
Innovation Department,
Ifo Institute, Munich
1. Why education is a key factor for economic growth,
employment and social cohesion, all goals of the
revised Lisbon strategy.
2. How efficiency and equity in education can be
achieved.
There is a clear positive association between the
quality of education and economic growth: The
more children learn in the education system, the
more favourable is economic performance. In terms
of jobs the answer is similar. Since education raises
productivity, those with higher education are more
likely to find jobs. With ever fewer low-skilled jobs
as a result of globalisation and technical change, job
prospects depend on how well we do in educating
our children. On top of that, most of the difference in
earnings inequality across countries can be attributed
to differences in inequality of educational quality.
they are also the most equitable. Public intervention
programmes for very young children constitute both
efficient and equitable policies.
More generally, there are three aspects that constitute
efficient and equitable education policies: accountability,
choice and inclusiveness. Our empirical evidence
confirms that students perform much better if there are
external exams, especially when combined with school
autonomy. Once you have a culture of evaluation that
provides accountability with information on how much
students have learned, you can leave it to the schools to
proceed as they know best. In addition, students learn
most where all schools are publicly funded but as many
as possible are managed by private entities, with school
choice for parents.
With regard to equity, we analysed how the
inequality of the outcome changes from fourth grade
to ninth grade between countries with early tracking
and those with no early tracking. We found that
inequality is increased
by early tracking with
no gains at all in terms
of efficiency. We also
found that individual
student
performance
depends much stronger
on family background in countries with early
tracking. A second factor important for equity is preprimary education. Achieving full enrolment in preprimary enrolment reduces inequality of opportunity
substantially. If you manage to get especially
children from disadvantaged backgrounds into
high-quality pre-primary education, this increases
equality of opportunity. If governments invest early
in the life cycle and use accountability, choice and
inclusiveness to achieve efficiency and equity in the
education system, this will foster economic growth,
jobs and social cohesion in Europe.
“Investments in early learning are
both efficient and equitable.”
Thus, there is abundant evidence that efficiency
and equity in education are key factors in the
Lisbon strategy. What matters is the quality of what
has been learned and not just years of schooling.
Empirically, once one has taken into account what
children have learned, years of education lose all
explanatory power; what matters is how well the
educational system performs.
This leads to the question of how we achieve
education policies that convey knowledge efficiently
and equitably. The basic concept of the life-cycle of
education policy is that learning induces
learning. The earlier you start, the more
you can build on previous education.
The rate of return is highest when the
children are very young, and tapers off
as people grow older. Comparing, in
addition, the returns for disadvantaged
children to those from well-off
families, empirical evidence shows that
measures for disadvantaged children
are particularly effective. The policy
conclusions are that the highest rates of
return are for disadvantaged children at
very early ages. Policies that focus on
these children are the most efficient and
1st Ifo BrIEF 2007
13
Panel 2
O d i l e Q uintin
T
he importance of this topic is underlined by
the fact that the key role of human capital in
the Lisbon strategy is widely recognised by socialscience research, as exemplified by the work of
Ifo, and by the results of a study carried out by
de la Fuente and Ciccone for the Commission‘s
Directorate-General for Employment, Social Affairs
and Equal Opportunities, when I was DirectorGeneral there. It has to be admitted, however, that
increasing attention is currently being devoted to
efficiency, sometimes at the expense of equity. Yet
inequities in education and training entail enormous
human and financial costs. But there is no real
trade–off between equity and efficiency; in fact the
two can reinforce each other.
4. Contrary to a widely-held assumption, “free”
systems of higher education financed entirely by
the state do not necessarily guarantee equitable
access and participation.
5. With regard to vocational education and
training, employers tend to provide training for
the most highly-qualified people, while showing
little interest in providing training for those who
are from a disadvantaged background, are of low
educational attainment or lack in basic skills. On
this point, the Commission adopted a separate
Communication on “adult learning” last October,
which proposes a plan of action to tackle the main
challenges facing this type of education.
For the future, the European
Union is helping Member States
to develop and implement their
education and training policies
by facilitating exchange of
information, data and good
practices through peer learning
and peer assessment. One of the
fields in which the European
Commission would welcome the
exchange of good practice is preprimary education.
This is the approach which the Commission has
followed in its Communication on the “efficiency
and equity of education and training systems”, which
was adopted last September. The Communication
concentrates on policies that reinforce efficiency by
raising average skill levels in the population while
simultaneously reducing inequalities by improving
the chances of the most disadvantaged groups and
narrowing the gap between the highest- and the
lowest-skilled people.
The Communication highlights the following five
key messages:
1. Member States should develop a “culture of
evaluation”.
2. Member States should invest more in pre-school
education.
3. As to the primary and secondary
levels, education systems that assign
children too early to separate types
of school according to their abilities
– so-called “tracking” – aggravate
differences in levels of schooling
linked to social origin. On the other
hand, combining local autonomy for
schools with central accountability
improves pupils’ outcomes.
Odile Quintin
Director-General,
Directorate-General for
Education and Culture, Brussels
The
Communication,
by
relying as it does on the results
of socio-economic research,
illustrates the benefits that policy
development can gain from a closer relationship
between the world of researchers and the world of
decision-makers. It is our wish that, through this
Communication, we will contribute to promoting
policy initiatives that are firmly based on research
evidence. Our ambition is to contribute to
changing attitudes and behaviour, and to raising
awareness of the waste of potential which school
failure entails, by highlighting the considerable
cost of inequity.
To conclude, I would like to emphasise that our
ambition for the future, with the support of the
research community, is to evaluate the extent to which
our education and training systems really do combine
efficiency and equity, but also, and especially, to
examine any future proposals on the modernisation
of our education systems so as to remedy their
imperfections and avoid the harmful consequences
of inequity and inefficiency in schools.
“Educational policies aimed
at improving efficiency and
reducing inequalities.”
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Panel 3
Demography, Employment and Social Protection:
The Future of the European Welfare State
Martin Werding
L
Martin Werding
Head, Social Policy and Labour
Markets Department,
Ifo Institute, Munich
isbon goals that relate to employment and
social protection are:
• increasing labour-force participation – overall,
but in particular among women and people
approaching retirement age;
• promoting the creation of more and better jobs,
among other things through reforms leading to
more employment-friendly wage setting;
• modernising social protection systems to
strengthen their financial and social sustainability
and to make sure that work pays.
The three fields of demography, employment and
social protection are obviously linked, so that
changes in one area have an impact on what happens
in the others. Yet, some of the interactions between
the three fields may be less obvious.
One is that demographic change, beyond diminishing
the future number of workers, may also reduce average
productivity of those who are still in employment,
affecting wages and, hence, the funding of social
protection. There are a number of well-known
effects of the decline in the growth rate of the labour
force that many European countries are now faced
with. Most notably, it will reduce the growth of GDP
and also GDP per capita, as total dependency rises
substantially through higher old-age dependency,
even if the growth of labour productivity (GDP per
worker) is unaffected. Any systematic links between
demographic characteristics of the labour force and
productivity are therefore of first-order importance.
Another aspect is that social protection may have
contributed to the fertility decline, by the way in which
they interfere with private intergenerational transactions.
Social protection schemes may feed back on the
unfavourable demography which now puts them under
pressure. Economic theory suggests several reasons
for the continued decline of fertility rates in developed
countries. In a nutshell, potential parents may be willing
to substitute higher “child quality” for the sheer quantity
of their children. In addition, changing preferences
regarding higher education and labourforce
participation
of women may
have increased the
opportunity cost of
raising children. Last
but not least, the introduction of public pensions, healthy
care etc. may have reduced the parental returns to having
children. Only the latter of these reasons almost certainly
renders the fertility decline an inefficient outcome, while
it is largely an appropriate response insofar as it is driven
by the former two.
“Social protection schemes
may impede job creation.”
1st Ifo BrIEF 2007
A third aspect arises from the way social protection
interacts with the labour market. Employment is not
only a funding source for social protection schemes but
the latter also provides a safety net stabilising labour
supply and industrial relations. However, the downside
is that existing welfare schemes may also create work
disincentives that prevent markets from functioning
properly in the adjustments to economic and social
change. Social protection schemes create work
disincentives and impede job creation by increasing
contributions in many areas of social protection with
substantial intergenerational redistribution. In addition
they also generate adverse effects through the benefits
that they offer. This is particularly true for many
programmes aimed at intra-generational redistribution,
such as unemployment benefits, social assistance or
income support. In many European countries benefits
of this kind provide a wage replacement whenever
individuals who could work remain unemployed
for an extended period of time. As benefits are often
withdrawn almost on a one-for-one basis if individuals
re-enter employment, the welfare state effectively acts
as a competitor of regular employment, creating an
“unemployment trap” for individuals with low earnings
capacities, that is, individuals with low skills who
are particularly hit by increased wage competition in
the globalised economy. Through these features, the
welfare state contributes substantially to the high level
and persistence of unemployment among low-skilled
workers that it is actually meant to alleviate. It impedes
structural change, reduces economic growth, and ends
up faced with high welfare costs that are to a good extent
spent on subsidising a waste of economic resources.
A promising strategy is a combination of in-work
benefits and direct activation measures. Examples are
the US “earned income tax credit” or the UK “wage
tax credit”. In any case, they should be modelled on
the old idea of a “negative income tax” in that they
are not withdrawn one for one if individual earnings
increase from zero to some threshold amount where
benefits are fully phased out. Benefits that are
redesigned along these lines must be complemented
by activation measures that reduce reservation wages
of the unemployed and alleviate job creation through
potential employers.
Panel 3
15
N i ko l a u s van der Pas
A
concern for me, especially as a member of the
Commission, is the economics of social policy.
I have this concern because I see that in the political
discussion in the European Union we increasingly
have the impression that the considerations of
competitiveness and those of social Europe are in
conflict with each other. I believe that unless we
make these two elements complementary, we are
going to have an enormous amount of trouble in the
European Union.
That is my conviction. But it has been difficult for
the Commission to explain that jobs and growth
have a very strong social component. Nothing is
competitiveness and growth and, on the other side,
social policy. To bring about a balance we need to
have the right arguments. Firstly, the economy is
good for the social dimension since growth obviously
generates employment. Secondly, jobs are the best
way out of poverty. We need inclusive growth. We
must make sure that everybody can participate in
this growth development and that we attain a better
and a more equal distribution of chances among our
citizens. Obviously we need economic growth in
order to pay for our aging society.
If we continue the present demographic
development, our pensions systems will come
under
pressure.
Their sustainability
and financing is a
matter of heated
public discussion.
“The social dimension of the Lisbon
strategy must be made more visible.”
more asocial than long-term unemployment. The
view that the social dimension in the European
Union is perhaps not sufficiently developed has
been gaining ground. We need to do more in order
to make the social dimension of the Lisbon strategy
more visible.
The question is how and what we are going to do
about it. Whatever is proposed in terms of organising
the social systems in the European Union, such as
social security, or whatever is proposed in terms
of flexicurity is seen with the greatest suspicion by
the trade unions. We have a public debate in which
positions are unfortunately not converging. We must
make sure that there is no contradiction between
Nikolaus van der Pas
Director-General,
Directorate-General for
Employment, Social Affairs
and Equal Opportunity, Brussels
There are also other
considerations.
We have recently
launched a new strategy for safe and decent working
conditions. It is quite obvious that keeping people in
jobs, maintaining their productivity and maintaining
their contribution to the economy as a whole is good
for the economy. Demography is another area. It
is now already clear that by 2050 the relationship
between active and non-active people will be 2 to 1
whereas a few decades ago it was 6 to 1 and now 4 to
1. The sustainability of pensions and the sustainability
of our health systems, of course, is now becoming a
very difficult issue in view of those prospects. It is
quite obvious that unless we make sure that older
people find jobs or stay longer in jobs, that women
are included more in the labour market as well as
handicapped people who can and want to work,
we are wasting an enormous amount of talent. And
lastly, it is quite clear that without a system of social
protection there is an economic consequence with a
broad impact. Peoples’ attitude toward schooling, for
instance, is demotivated. And the adaptability and
the flexibility of workers are much lower.
Many studies by the OECD and by the International
Labour Organization confirm the strong correlation
between social expenditure and economic growth.
But there is also another point. We look at
countries’ performance and we see that inside the
European Union countries like Finland, Sweden,
Denmark and Norway are at the top of the growth/
competitiveness index. At the same time, it is these
countries that have the highest percentage in terms
of tax revenues. They also have the highest social
protection expenditure. This very practical example
shows that you can have an extensive social model
and at the same time be highly competitive. And
this is the challenge we now have to face in the
European Union.
1st Ifo BrIEF 2007
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1st Ifo BrIEF 2007
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example shows that you can have an extensive social model and at the same time be highly competitive. And this is the challenge we now have to face
in the European Union.
Appendix
1st Ifo BrIEF 2007
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Appendix
Programm e
Lisbon: Br i n g i n g t h e G o a l p o s t s N e a r e r
10.30 am
Introduction
Welcome Addresses
Hans-Werner Sinn
President, Ifo Institute, Munich
Gerhard Stahl
Secretary-General, Committee of the Regions, Brussels
Keynote Address
Joaquín Almunia
Commissioner for Economic and Monetary Affairs,
European Commission, Brussels
11.15 am
Panel 1
Offshoring, Outsourcing and the Forces
of Globalisation
Hans-Werner Sinn
President, Ifo Institute, Munich
Pervenche Berès
Chairwoman, Committee on Economic
and Monetary Affairs, European Parliament, Brussels
Discussion
12.45 pm
1st Ifo BrIEF 2007
Lunch
Appendix
1.15 pm
19
Panel 2
Efficiency and Equity in European Education and
Training Systems as Key Factors in the Revised
Lisbon Strategy
Ludger Woessmann
Head, Human Capital and Innovation Department,
Ifo Institute, Munich
Odile Quintin
Director-General, Directorate-General for Education
and Culture, Brussels
2.45 pm
Coffee Break
3.00 pm
Panel 3
Demography, Employment and Social Protection:
The Future of the European Welfare State
Martin Werding
Head, Social Policy and Labour Markets Department,
Ifo Institute, Munich
Nikolaus van der Pas
Director-General, Directorate-General for Employment,
Social Affairs and Equal Opportunity, Brussels
4.00 pm
Discussion
Concluding Remarks
Hans-Werner Sinn
President, Ifo Institute, Munich
1st Ifo BrIEF 2007
20
Appendix
BrIEF Orga n i s e r s
T
Committee of the Regions,
Brussels
he Committee of the Regions (CoR) is the
political assembly that provides local and
regional authorities with a voice at the heart of the
European Union. Established in 1994, the CoR was
set up to address two main issues. Firstly, about
three quarters of EU legislation is implemented at
the local or regional level, so it makes sense for
local and regional representatives to have a say in
the development of new EU laws. Secondly, there
were concerns that the public was being left behind
as the EU steamed ahead. One way of closing the
gap was involving the elected level of government
closest to the citizens.
The Treaties oblige the Commission and Council to
consult the Committee of the Regions whenever new
proposals are made in areas that have repercussions
at the regional or local level. The Maastricht Treaty
set out 5 such areas – economic and social cohesion,
trans-European infrastructure networks, health,
education and culture. The Amsterdam Treaty added
another five areas to the list – employment policy,
social policy, the environment, vocational training
and transport – which now covers much of the scope
of the EU’s activity.
Outside these areas, the Commission, Council and
European Parliament have the option to consult
CoR on issues if they see important regional or local
implications to a proposal. CoR can also draw up an
opinion on its own initiative, which enables it to
put issues on the EU agenda. There are three main
principles at the heart of the Committee’s work:
Ifo Institute for Economic Research
at the Universitiy of Munich
Subsidiarity: This principle, written into the
Treaties at the same time as the creation of CoR,
means that decisions within the European Union
should be taken at the closest practical level to the
citizen. The European Union, therefore, should
not take on tasks that are better suited to national,
regional or local administrations.
Proximity: All levels of government should aim to
be close to the citizens, in particular by organising
their work in a transparent fashion, so people know
who is in charge of what and how to make their
views heard.
Partnership: Sound European governance means
European, national, regional and local government
working together – all four are indispensable
and should be involved throughout the decision
making process.
1st Ifo BrIEF 2007
T
he Ifo Institute, founded in January 1949,
derives its name and purpose from two words:
Information and Forschung (research). The Ifo Institute
is one of the leading economic research institutes in
Germany and the one most often quoted in the media.
A co-operative agreement links it closely with the
Ludwig Maximilian University (LMU) in Munich, and
in 2002 it was officially proclaimed an “Institute at the
University of Munich”. The Ifo Institute is a member
of the Leibniz Association and its research funding is
anchored in the German constitution.
Mission and tasks
The Ifo Institute is an independent and competent
• producer of data and information on the national
and international economic situation and its
development, which is in great demand in industry, in
government and by the public,
• a driving force and impetus-giver for the debate on
economic policy in Germany and Europe, as well as
• an internationally oriented centre of empirical
economic research.
The tasks of the Ifo Institute are threefold:
Services for researchers, business, government
and the general public
The Ifo Institute dedicates a large part of its capacity to
economic-policy services, including the compilation,
processing and the provision of economic data and
information, the compilation of material for the
comparison of international institutions within the
framework of DICE – the Database for Institutional
Comparisons in Europe – and the collection and
processing of other macroeconomic data.
Applied economic research
The Ifo Institute acts as a mediator between university
research and the general public, including the media,
by applying theoretical knowledge gained from its
compiled economic data to practical economic policy.
Policy consulting for the public and private sectors
The Ifo Institute uses its database and research
competence to participate in the public debate on
economic policy and reform concepts.
National and international co-operation partners
The Institute fosters the exchange of ideas with
institutions, universities and researchers throughout the
world. Apart from its close ties to LMU, co-operation
with its other partners also enriches the work of the
Institute. Numerous networks have been created
from project co-operations.
Appendix
Conference venue:
Committee of the Regions
Bâtiment Jacques Delors
Room: JDE 51
Rue Belliard 99-101
1040 Brussels
Belgium
Contacts:
Executive committee:
Jutta Albrecht
21
Ifo Institute for Economic Research
Tel. 00 49 / (0) 89 - 9224 - 1332
Mail: [email protected]
Annette Hagemann
Committee of the Regions
Tel. 00 32 - 2 282 - 2009
Mail: [email protected]
1st Ifo BrIEF 2007