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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.” 1st Ifo BrIEF 2007 14 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 16 1st Ifo BrIEF 2007 17 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 18 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