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A joint initiative of Ludwig-Maximilians University’s Center for Economic Studies and the Ifo Institute for Economic Research
Bulletin
Volume 18 No. 1
January 2008
STRIVING FOR CONTINUOUS EDUCATION
If industrialised countries cannot compete on the wages of their labour with the emerging lowcost countries, they have to compete with the quality of their skills. That’s where continuous
education comes in. Stefan Wolter shows why this is crucial.
(page 6)
PERSISTENCE OF EMPLOYMENT PROTECTION
IFO NEWS
Protecting employment can be too much of a good thing. As some countries have shown,
most notably the UK and Denmark, loosening up a bit on this kind of protection can do wonders for employment levels. And still employment protection persists in many countries.
Björn Bruegemann explains what role involuntary dismissal plays on this.
(page 7)
(p. 4-5)
CESIFO INTERNATIONAL SPRING
CONFERENCE
(p. 5)
EEAG REPORT 2008
ON SUBSIDISING EDUCATION
Bas Jacobs has shown that more redistributive governments should subsidise education
more. Then, he took this a step further and examined the role of the earnings function on
subsidising education. Now, he tackles the life-cycle interactions between education,
labour market performance, and retirement.
(page 8)
(p. 2)
RESEARCH SEMINARS
(p. 6)
MUNICH SEMINARS
(p. 3)
FEATURED RESEARCHERS
Björn Bruegemann (p. 7)
Claudia M. Buch (p. 3)
Bas Jacobs (p. 8)
Alexander Kemnitz (p. 3)
Marko Koethenbuerger (p. 7)
Rigmar Osterkamp (p. 7)
Ulrich Woitek (p. 8)
Stefan Wolter (p. 6)
THE 2008 EEAG REPORT ON THE EUROPEAN ECONOMY
This year’s EEAG Report, the seventh in the series, contains unconventional views on some
of the most pressing issues on the European economic horizon: globalisation and global
warming. On the former, the report asserts that it may be good for employment levels in
Western Europe; on the latter, that the current measures to curb global warming may be not
only ineffective but even counterproductive.
(page 2)
DECISION-MAKING IN HOUSEHOLDS
For several thousand years, we have improvised regarding decision-making in our households. Now help is on the way. Alexander Kemnitz is applying rigorous scientific methods to exploring the inefficiencies and possible solutions in this area.
(page 3)
GLOBALISATION’S GROWING PAINS
Growing income disparities, persistent unemployment and workers’ perceived insecurity
are all often attributed to globalisation. Policymakers are under pressure to “do something”. Just what can be done and what it effects can be is part of the research Claudia
Buch will pursue while at CES.
(page 3)
THE OLD AND THE NEW
Ulrich Woitek’s interests range from quantitative economic history to applied
macroeconometrics, ie the past and the now. Monetary policy issues in the 1930s or the
anthropometric history of Switzerland fascinate him as much as estimation techniques for
Dynamic Stochastic General Equilibrium models.
(page 8)
Online version of this issue available at www.cesifo.de
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Vol. 18, No. 1 • January 2008
7TH MUNICH ECONOMIC SUMMIT
EUROPE IN THE GLOBAL COMPETITION FOR
Nobody disputes
that, in an era of
increasing globalisation, with
low-wage jobs
and
low-cost
manufacturing
readily available
around
the
globe, Europe
must
rely
increasingly on
innovation to
stay
ahead.
Innovation, in
turn, depends primarily on the quality and
quantity of talent available. What is less
clear is what can be done to nurture,
attract and retain such talent. That will be
the theme of the 7th Munich Economic
Summit, which will be held on June 5
and 6, 2008, in Bavaria’s capital city.
One puzzle is that while the unskilled
are ready to even risk their lives to get
into Europe, highly skilled professionals
seldom deign to even try for a European
visa: the best educated prefer Canada,
Australia, the United States or Singa-
TALENT
Europe’s
job
markets grow
ever larger.
pore. It appears that a combination of
lethargic economies, stifling regulations
and powerful national lobbies all conspire to make many of the continent’s
economies unattractive.
These same factors prompt many of the
Europe-grown talents to pack their bags
and turn their backs on the home country. Germany loses doctors to Britain,
Britain loses engineers to Australia,
Eastern Europe many of its best brains to
the rest of the world. Business leaders
are understandably anxious as gaps in
Is the Blue Card
proposed by the
European Commission the solution to attract talent? Can European
governments harmonise
their immigration policies?
Can the need for
more immigration be reconciled with the toxic mood
towards foreigners prevailing in many
European countries?
And once you nurture or lure this talent,
what can be done to retain it? Are higher
salaries a solution? Or a more innovative
culture, open to exploring and exploiting
new fields?
The Munich Economic Summit is organised by the CESifo Group and the BMW
Foundation Herbert Quandt, in partnership with The Times of London.
THE 2008 EEAG REPORT
firms from international competition, a
tendency that has outspoken advocates
in some quarters. For that reason, argue
the report’s authors, industrial policy
should be located at the regional and EU
level, and reduced at the national level.
The European Economic Advisory
Group at CESifo will release its seventh
yearly report on February 26th in Brussels, followed by launch ceremonies in
several other European capitals.
Under the title Europe in a Globalised
World, the report provides a comprehensive forecast for the European economy
in 2008, which, on account of the
upheavals caused in international financial markets by the subprime crisis in the
United States, makes a global perspective
more relevant than ever. A crucial issue in
this regard is how large and persistent the
depreciation of the US dollar against the
euro will be, an issue analysed in depth in
Chapter 2 of the Report.
The independent nature of the report’s
authors—seven high-ranking scholars
from seven European countries—
enables them to offer fresh and unconventional views for policy-makers.
One of these unconventional views,
nonetheless firmly based on sound economic reasoning and data, posits that
the impact of increased economic integration with low-wage economies on
Western European jobs is, on the whole,
beneficial. Its message is that, when all
effects are taken into account, globalisation is more likely to raise than reduce
employment, as it will tend to dismantle
rigidities in Europe’s labour markets.
Another chapter argues against using
industrial policy to protect European
The final chapter addresses global
warming from a fresh perspective: the
supply side. Without a proper analysis of
supply-side effects, demand-reducing
measures, hitherto regarded as self-evident solutions, risk not only being ineffective, but even counterproductive.
The EEAG Group consists of Lars Calmfors (Stockholm University, chairman),
Gilles Saint-Paul (U. of Toulouse),
Giancarlo Corsetti (European University Institute, Florence), Michael Devereux (U. of Oxford), Jan-Egbert Sturm
(KOF Swiss Economic Institute, ETH
Zurich), Xavier Vives (IESE Business
School), and Hans-Werner Sinn (Ifo
Institute and University of Munich).
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Vol. 18, No. 1 • January 2008
GLOBALISATION’S LABOUR PAINS
DECISION-MAKING IN HOUSEHOLDS
Buch
Kemnitz
are under pressure to either
directly raise new barriers to
the integration of markets
through protectionist measures
or to regulate labour markets.
There is no doubt that the
present wave of globalisation
exerts an impact on labour
market volatility. Just how it
exerts which impacts is something Claudia M. Buch, of
Tübingen University, is
focusing part of her research
efforts on.
The increasing integration of
international markets, facilitated through deregulation and technological progress, has changed the economic landscape. Emerging countries
account for an increasing share of world
production, and relative prices of capital and labour have changed. Shifts in
the relative earnings of capital and
labour are in particular troubling for the
labour market performance in developed countries. Growing disparities of
income or—in many continental European countries—persistent unemployment are often attributed to the increasing integration of the world economy.
Survey evidence also suggests that a
growing degree of integration into international markets increases workers’
perceived insecurity.
Shifts in the relative supply of labour and
a perceived increase in the instability of
employment have increased political
pressure to alleviate the negative consequences of globalisation. Policymakers
Claudia Buch’s research aims
at analysing the consequences
of globalisation for labour
market stability from a macroand microeconomic perspective. The focus will be on
three questions: Has the volatility of key
labour market indicators such as employment and wages changed over time? Do
developments at the industry-level and at
the aggregated level differ? What is the
impact of an increased integration of
markets on labour market volatility?
How does the growing integration of
international capital markets affect
labour market risks?
Claudia M. Buch holds the chair for
International Finance and Macroeconomics at the University of Tübingen.
She is also the Scientific Director of the
Institute for Applied Economic Research
and a member of the Council of Economic Advisers to the German Ministry
of Economics and Labour. She holds an
MBA from the University of Wisconsin
and a Master of Economics from the
University of Bonn. Her PhD and her
post-doctoral degree (Habilitation) are
from the University of Kiel.
sponsored by
Deutschlands große Tageszeitung
MUNICH SEMINARS
BMW Niederlassung München
Wegweisend und voller Wertschätzung für Sie.
Chaired by Hans-Werner Sinn (CESifo) and Marc Beise (Süddeutsche Zeitung)
Sponsored by BMW Niederlassung München
Monday, 6 pm, CESifo Conference Centre, Ludwig-Erhard-Hall, Poschingerstr. 5, Munich
21 January 2008
Dr. Ursula Engelen-Kefer
Member of the SPD party executive
Soziale Gestaltung der Globalisierung
26 May 2008
Prof. Dr. Theodor Baums
Institute for Law and Finance,
University of Frankfurt
Räuberische Aktionäre – Was tun?
21 April 2008*
Prof. Dr. Axel Weber
President of the Deutsche Bundesbank
*Topic to be announced
16 June 2008*
Prof. Berthold Leibinger
Member of the Executive Board of
TRUMPF Laser- und Systemtechnik GmbH
Decision-making
processes within
the household can
be a tricky field to
explore. That is
exactly
what
Alexander Kemnitz, of the Technische Universität
Dresden, is doing.
He is devoting
part
of
his
research, which he will continue while at
CES, to the interaction between individual specialisation in market or home production and bargaining power and the
effects of non-transferable utility.
Both aspects, he points out, limit the
scope of agreement on Pareto-improving
joint actions between spouses, the first
one creating a commitment problem, the
second one putting a technical upper
ceiling on redistribution between partners. I plan to analyse to what extent
family policy measures can help to overcome these inefficiencies, in particular
with respect to fertility decisions.
A further field of interest for Mr Kemnitz is economics of education. In this
area, he plans to extend his research on
the impact of student and graduate
mobility on higher education funding.
While public funding for higher education is often said to be eroded by mobility, private funding is often criticised for
social selection.
Mr Kemnitz wants to analyse to what
extent the latter problem can be mitigated by quality improvements resulting
from university competition. In that context, he would also like to consider differential tuition treatment of in- and outstate students, a feature common in the
US and recently making the rounds in
Germany as well.
Alexander Kemnitz is a Professor of
Economics at the Department of Business and Economics of the Technische
Universität Dresden. He received his BA
from the University of Bonn and his doctorate from the University of Mannheim.
He is the author of the monograph Immigration, Unemployment, and Domestic
Welfare, published in 2006.
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Vol. 18, No. 1 • January 2008
IFO NEWS
IFO ECONOMIC FORECAST FOR 2008:
ECONOMY TO LOSE MOMENTUM
as in India and Latin America, a slowing
of economic activity is expected.
In 2007 the world economy expanded
at a very strong 5.2%. However, the
turbulence in the international financial
markets point to an increase in economic risk.
As the Ifo Institute correctly forecasted
in December 2006, the economic upturn
that commenced in 2005 continued
despite the massive increase in the rate
of the value added tax. The internal and
external domestic forces were powerful
enough to counteract the restrictive effects of
fiscal policy. The
main
driving
force continued
to be foreign
demand, which
despite the massive appreciation
of the euro vis-àvis the US dollar
remained strong
owing to the
expanding world
economy. By the time of the forecast Ifo
expected a real GDP growth of 2.5%,
which has been confirmed by the official
data released in January. The economic
upswing took place without private consumption. Consumer willingness to
undergo larger purchases was massively
weakened after the increase in VAT; in
the second half of the year, with the
increasing rate of inflation, it was clearly
reduced once again. Thus, growth
peaked last winter and since then has
been clearly slowing.
The Ifo World Economic Climate
worsened significantly in
the
fourth
quarter
of
2007; assessments of both
the
current
economic situation and the
six-month
outlook were
revised downwards. The
worsening of
the Ifo World Economic Climate affected Western Europe, North America and
Asia, with the sharpest decline in North
America, primarily in the United
States. These survey results indicate
that the momentum of world economic
growth will slow noticeably.
In the United States, falling real-estate
prices and higher interest rates will
dampen the expansion of consumer
spending. Investments will only gradually recover in the course of 2008 and in
2009. Housing construction spending,
currently in a state of free-fall, will have
a strongly dampening effect, contributing to lower GDP growth.
The Japanese economy will remain on
solid footing. In the euro area, the
increase in GDP will slow. Because of
higher inflation, the increase in consumption will be moderate; investment will
also expand at a weaker pace, especially
since the apex of the investment cycle
seems to have already passed. In the
emerging economies economic growth
will cool down somewhat in the forecast
period. In China the expansion of GDP
will remain robust but will flatten slightly due to slower export growth. Also in
the other countries of East Asia, as well
At year-end 2007 the German economy
was still in an upturn phase, albeit with
declining momentum. In 2008 the
expansion pace of aggregate output will
initially weaken further because of a
dampening in investment activity owing
to the many projects that were brought
forward to 2007. This will mean a considerable weakening of the most important driving force of domestic demand up
to now. Afterwards, however, a return to
potential growth is expected because
growing employment and the concomitant expansion of purchasing power in
private households will stimulate consumption. The Ifo Institute expects a
1.5% rise in consumer spending, which
because of the slightly growing rate of
inflation is somewhat less that in the
joint autumn forecast of the German economic institutes. All in all, real GDP will
expand by 1.8%, but owing to more
working days, by a calendar-adjusted
rate of only 1.5%. The inflation rate –
measured in terms of the consumer price
index – will rise to 2.3%, on average for
the year 2008, having stood at 2.1% in
2007. Employment will increase by an
annualised 290,000 to 40 million. The
unemployment rate will then amount to
8.0%. The government budget will presumably show a slight deficit since the
tax revenue situation will not improve
further. In 2009, overall capacity utilisation is likely to stagnate. Real GDP will
increase, according to our initial estimates for 2009, by 1.5% (calendaradjusted, by 1.6%).
This forecast is marked by very high
risks. It is based on the assumption that
the price for Brent Crude will stand at
about 90 US dollars per barrel and that
the exchange rate of the euro will fluctuate at around 1.45 US dollars. Because of
their speculative nature, neither factor
can be reliably forecast. For the economic expansion in the United States, the
greatest risk lies in a further worsening
of the real-estate crisis, which could lead
to a further drop in housing prices. This
could severely dampen the consumption
of private households since the negative
asset effect would be much stronger and
since the rise in interest charges would
be more sharply felt. Investment will
also be negatively affected since business profits would be reduced and borrowing would become more restrictive.
This would also have negative effects
on the labour market, with the consequence that the increase in employment
would be more moderate, accompanied
at the same time by rising unemployment. In this risk scenario, should monetary policy react by pursuing an
expansive course, the additional danger
would ensue that the US dollar would
depreciate even further as a result of
more massive cuts in interest rates.
This could lead to a worsening economic outlook in other regions, such as
the euro area.
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Vol. 18, No. 1 • January 2008
CESIFO INTERNATIONAL
SPRING CONFERENCE
IFO INSTITUTE CALLS FOR A MORE
OBJECTIVE DISCUSSION OF THE
MINIMUM WAGE ISSUE
In the current discussion regarding the
introduction of minimum wages, the
basic principle of a market economy –
the regulation of supply and demand by
the price mechanism – has been greatly
neglected, and even called into question.
Any consumer is able to understand
how the goods market functions: If the
price of apples increases, fewer apples
are bought; if gasoline becomes more
expensive, one drives less and decides
to buy a more economic model next
time. “With regard to the labour market, many believe they can deviate from
this basic principle without any negative effects on the demand for labour”,
Joachim Ragnitz and Marcel Thum of
the Dresden subsidiary of the Ifo Institute point out. “How many workers a
company needs depends decisively on
the wage bill”, Ragnitz and Thum
explain and warn of the consequences
of wrongly motivated wage increases:
“A workplace will only by filled if its
productivity exceeds its labour cost.
Wage increases that are not covered by
productivity gains lead to dismissals.”
Their calculations on the employment
effects from an introduction of minimum wages are based on simple and
fundamental market mechanisms. A
minimum wage is harmless if it lies
below the market wage; it leads to job
losses, however, if it is clearly above
this. Even with a moderate minimum
wage of €4.50 in Germany, 360,000
jobs would be lost in total. This number
increases to 827,000 with a minimum
wage of €6.50 and to 1.1 million jobs
with a minimum wage of €7.50. If, in
the extreme case, the minimum wage
introduced for letter carriers (€9.00 in
east and €9.50 in west Germany) was
introduced for all sectors of the economy, the jobs losses would amount to 1.9
million. For these calculations a conservative estimate of wage elasticity of 0.75 percent was employed.
The results of a minimum wage for the
labour market depend on the avoidance
reactions and the absolute size of the
low-wage sector. According to the most
current research of the Federal Statistical Office for the wage and salary
structure in the manufacturing industry
and in selected service sectors in 2001,
12.8 percent of employees earned less
than €7.50.
Ragnitz and Thum point out that the
objections raised in the public discussion to their calculations are untenable.
Higher wages for low-wage earners do
not stimulate overall economic
demand but lead on the whole to
shrinkage of aggregate spending
power, since company profits decline
and unemployment rises.
A further argument against the estimates presented by the Ifo Institute
states that the assumed wage elasticity
is poorly substantiated empirically. “All
relevant estimates in the literature show
negative values”, Ragnitz and Thum
explain. There can be no doubt that a
wage increase is always linked with a
decline in employment. “From a scholarly viewpoint it is completely inadmissible to start with a wage elasticity of
zero, as some politicians appear to do”,
the researchers criticise.
The argument is also misleading that
the introduction of minimum wages in
specific sectors in Germany has had no
negative employment effects, and that
consequently the labour market model
on which the Ifo calculations were
made is unsuitable. The study of König
and Möller (2007), which examined the
introduction of minimum wages in the
employee posting law in the construction industry, drew the conclusion that
employment among the low-skilled in
construction declined significantly in
eastern Germany but that no effects (or
in one variant only weak effects) were
found for western Germany.
“This study by no means supplies a
counter argument”, Ragnitz and Thum
explain. The insignificant increase in
employment in the west could be
explained by the displacement of eastern German firms as a result of the minimum wage.
The CESifo
International
Spring
Conference
has returned
to Berlin, as
requested by
numerous
participants.
To be held this year on March 13 and 14
at the premises of the Representation in
Germany of the European Commission,
the conference will follow its traditional
format of dedicating the first day to economic and financial issues of global or
European impact, and the second to specific European industries.
As to be expected, the subprime financial
crisis in the United States will colour
many of the presentations this year.
Patrick MacGuire, of the Bank for International Settlements, will speak on market repricing to reflect growth risk, while
Jan-Egbert Sturm, of the KOF Swiss Economic Institute, ETH Zurich, will address
the European economy in the wake of
slower growth. Michele Perétié of Bear
Stearns will deal with exchange rates and
monetary policy, and Jürgen Kröger, of
the European Commission, will look at
the challenges to European competitiveness from globalisation and integration.
The second day will open with a review
of the prospects for aeronautics, a fastgrowing European megaindustry, by
Klaus Broichhausen, of Bauhaus Luftfahrt. The steel industry will be
addressed by Jeroen Vermeij, of Eurofer,
while the chemical industry will be
analysed by Moncef Hadhri, of CEFIC.
After a short break, Thomas Hueck, from
Bosch, will warn decision-makers to
watch the trend, not the cycle in the automotive industry, while Michele
Schweinöster, of ANIMA, will provide an
Italian perspective on the European engineering industries.
The high energy prices of course could
not be absent. Elisabeth WaelbroeckRocha, of BIPE, will examine their
impact on European sectors and member
states. Further info at:
www.cesifo-group.org/isc
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Vol. 18, No. 1 • January 2008
STRIVING FOR CONTINUOUS EDUCATION
Wolter
Continuous education or
adult education is high on the
agenda of education policy in
all industrialised countries. In
light of the current demographic changes and ageing
workforces, continuous training will get even more attention in the coming years.
But the fact that some categories of the adult population – mostly
those with already low levels of education and working in low wage sectors –
do almost never participate in continuous
training is worrying in most countries.
Many governments therefore consider
stimulating the demand for continuous
education with subsidies. A popular but
yet not well tested idea is to subsidise
adults with training vouchers in order
to increase participation rates of adults.
Although the idea of vouchers in education is well accepted in economics,
most economists are sceptical about the
usefulness and effectiveness of vouchers in adult education. Is a voucher sufficient to raise the participation rate of
adults with low educational levels and
if so, does it create huge windfall gains
by just replacing private investments
with public funds? Ex post evaluations
of the few existing voucher programs
have not been able to give convincing
answers to these questions so far.
This is where Stefan Wolter comes in.
In collaboration with the Swiss Federal
Office for Professional Training and
Technology and the Swiss Federal Statistical Office, the Centre for Research
in Economics of Education at the University of Bern – which Prof. Wolter
heads – started in 2005 a large-scale
field experiment to give answers to the
questions raised above. The setting consists of some 2400 people, drawn randomly from the Swiss Labour Force
Survey (SLFS) who got vouchers for
adult education in 2006 with nominal
values ranging from 120 to 900 euros.
The control group in the experiment
were the remaining persons surveyed in
the SLFS. The experimental
and control group were surveyed at least once (2005)
before the voucher experiment and then surveyed again
in 2007, one year after the
experiment. This gives the
experiment a very rich and
broad data base that will help
to clear up numerous questions that have remained
unanswered so far.
While at CES, Professor Wolter will
work on the first scholarly articles that
describe the results of this field experiment.
Stefan Wolter is Director of the Swiss
Coordination Centre for Research in
Education and head of the Centre for
Research in Economics of Education at
the University of Bern, where he holds
a honorary professorship.
Prior to his work in education he was
chief economist at the Federal Office
for Industry and Labour in Switzerland,
member of the National Economic
Council and Swiss representative to
various international organisations.
Today he represents Switzerland at the
board of the Centre for Educational
Research and Innovation (CERI) of the
OECD in Paris. He is also president of
the Swiss Federal Institute for Vocational Education and Training and Codirector the Swiss Leading House in
Economics of Education, a joint
research initiative with the University
of Zurich (together with Prof. U. BackesGellner, University of Zurich).
He obtained a Master in Economics
and Psychology at the University of
Bern, where he also received his PhD
in Economics in 1995 and his post-doctoral degree (Habilitation) in 2003.
Together with Samuel Mühlemann, he
authored Regional Effects on Employer
Provided Training: Evidence from
Apprenticeship Training in Switzerland, which is forthcoming in the Journal for Labour Market Research (ZAF).
HANS-MÖLLER SEMINARS
Seminar for International Economic
Relations Library, Ludwigstr. 28/II,
Tuesdays, 4:30 - 6:00 pm
8 January 2008
Christoph Buchheim
University of Mannheim
The Economic Development of Germany in
the Third Reich: A Comparison with the
Post-WW II Period
15 January 2008*
Bob Allen
Oxford University
22 January 2008*
Arthur van Soest
Tilburg University
29 January 2008*
Jaume Ventura
University Pompeu Fabra
5 February 2008*
Ronnie Schöb
FU Berlin
* The subject for these seminars can be seen at
www.hans-moeller-seminar.vwl.uni-muenchen.de/index.html
RESEARCH SEMINARS
Winter Semester 2007/08
Monday 3:15 p.m. CES, Schackstr. 4, Munich
7 January 2008
Adam Szeidl
University of California at Berkeley
Imports and Productivity
14 January 2008*
Anna Stangl
University of Munich
14 January 2008*
Julia Bersch
University of Munich
21 January 2008*
Lars Siemers
RWI Essen
28 January 2008*
Stefan Behringer
University of Frankfurt
4 February 2008*
Reto Foellmi
University of Bern
* The topic for this seminars is listed at
www.lrz-muenchen.de/~u5231ae/webserver/webdata/seminar.html
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Vol. 18, No. 1 • January 2008
PERSISTENT EMPLOYMENT PROTECTION
Bruegemann
Most countries have adopted
regulations making it costly
for firms to dismiss workers.
The stringency of employment protection (EP), however, differs greatly across
countries. Furthermore, these
differences have been very
persistent, despite longstanding calls for deregulation.
Björn Bruegemann’s research
has focused on understanding the mechanisms underlying this persistence. A
simple story goes as follows: strict EP
keeps workers in unproductive jobs; if
regulation were removed, these workers
would become unemployed; hence they
oppose deregulation. According to this
story, once EP has been introduced, it
creates its own constituency and
becomes very difficult to deregulate.
Mr Bruegemann analyses under which
circumstances this story holds true. He
shows that the answer depends on what
EP does for workers. One possibility is
that it strengthens the workers’ bargaining position, enabling them to obtain
higher wages. Another is that dismissal is
sometimes involuntary to workers, and
that EP prevents involuntary dismissal.
He demonstrates that if EP uniformly increases wages of all
workers while dismissal is voluntary, then the simple story outlined above does not hold true
any longer. This result suggests
that involuntary dismissal is key
to understanding the persistence
of dismissal regulations. In a
quantitative analysis he shows
that involuntary dismissal is
indeed a potent source of persistence.
In related work, he argues that not only
is EP difficult to deregulate, it is also difficult to introduce: those workers who
would gain most from introducing job
protection may never see those benefits,
because firms would dismiss them
before EP actually takes effect. Anticipating this, workers in this position are
unlikely to support proposals to introduce protection.
Continuing this research agenda while at
CES, Mr Bruegemann plans to investi-
gate the prevalence of involuntary dismissal empirically.
Björn Bruegemann is an assistant professor at Yale University. He received
his PhD from MIT and his MSc from the
University of Bonn.
CHANGE OF EDITORSHIP AT DICE REPORT
The CESifo DICE
Mr Osterkamp took
Report has been
a leave of absence
from the Ifo Instipublished
since
tute to take on a
2003. From the
new task in Namibbeginning, Rigmar
ia. His position as
Osterkamp was
Editor of the CESione of the two edifo DICE Report has
tors (the other one
been taken over by
is Wolfgang Ochel).
Marko KoethenIt is largely due to
Rigmar Osterkamp (left) and
buerger.
Mr
Osterkamp’s
Marko Koethenbuerger (right)
efforts that DICE
Mr Koethenbuerger
Report has become a respected journal in
holds a PhD from the University of Paderinternational institutional comparisons.
born, is a Research Director at CESifo,
It is read not only by economists but also
and was an assistant professor at the Cenby policy-makers and journalists
ter for Economic Studies of the Ludwig
throughout the world.
Maximilian University of Munich.
CESIFO ECONOMIC STUDIES:
FEDERALISM REVISITED
The
latest
issue of CESifo Economic
Studies, published
by
Oxford University Press
on behalf of
the
CESifo
Group, takes a
fresh view at
federalism,
based on the
proceedings of
a special conference held a few months
ago in Lexington, Kentucky.
Co-sponsored by the Institute for Federalism and Intergovernmental Relations at
the University of Kentucky and by CESifo, the conference aknowledged that global changes in institutional structures and
economic conditions within and among
countries, including fiscal, economic and
political reforms, have highlighted the
importance of the division of fiscal and
political responsibilities among governments. Better understanding of the fiscal
policies and interactions of governments,
and of their institutional and political
underpinnings, presents deep intellectual
challenges as well as opportunities for
useful policy applications.
Five keynote addresses presented at that
conference were selected for this issue of
CESifo Economic Studies. In one of them,
George Zodrow reviews the property tax
incidence debate and the mix of state and
local finance of local public expenditures.
Robert Inman examines empirically
how and to what degree federalism contributes to improved economic performance, highlighting in particular its role in
securing property rights and its dependence upon democratic governance. Jens
Brøchner and his colleagues delve into
the dilemmas of tax co-ordination in the
enlarged European Union, while
Jacques Drèze and his colleagues ask
whether federal grants can mitigate
social competition.
Finally, John D. Wilson pits the welfare
state against the common labour market,
and asks which should be dismantled.
More at www.cesifo.oxfordjournals.org
bulletin_0801.qxp
01.07.2008
10:15
Page 8
Vol. 18, No. 1 • January 2008
ON SUBSIDISING EDUCATION
HISTORY AND MACROECONOMETRICS
Jacobs
Woitek
Checking the literature on the
marginal cost of public funds
and the optimal provision of
public goods, Bas Jacobs, of
Erasmus University Rotterdam, found several problems.
The MCF, he says, is mostly
studied in optimal tax models
without redistributional concerns. Hence, the fundamental
reason why the government
introduces tax distortions is not explicitly
taken into account. This has important
and non-trivial consequences for the
Samuelson rule.
By leaving out the distributional benefits
of distorting tax rates, the optimal level of
public goods is probably too low. Furthermore, Mr Jacobs shows that standard
measures for the MCF are highly sensitive
to the normalisation of the tax system,
which is an awkward property and makes
standard MCF measures useless for practical policy analysis.
Finally, the literature cannot adequately
relate the marginal excess burden of taxation to the MCF, unless one assumes that
public goods are perfect substitutes for
cash. That is an extremely unattractive
assumption, because it is not clear what is
‘public’ about providing ‘cash’ and why the
government would use distortionary
income taxes to provide it. In the project
Mr Jacobs will pursue while at CES, he will
try to resolve all three problems.
A further field he is studying is optimal
tax and education policies in models with
endogenous labour supply and education
choices and heterogeneous agents. In earlier joint work with Lans Bovenberg, Mr
Jacobs showed that optimal education
policies should ensure efficiency in
human capital formation if redistributive
income taxes distort education choices.
Therefore, more redistributive governments should subsidise education more.
This second-best argument can explain
the widespread use of education subsi-
Bulletin
dies, whereas standard explanations (external effects, liquidity constraints and so on)
are either theoretically or
empirically too weak.
In recent work, he also shows
that these results are sensitive
to the particular earnings functions used. Indeed, when education is strongly complementary to work effort, education
subsidies can be used to reduce tax distortions on labour supply. However, education subsidies are also regressive if highability individuals benefit most from education subsidies. He demonstrates that
non-separabilities in the earnings function
are crucial as to whether education should
be taxed or subsidised (on a net basis) in
an optimal redistributive tax system.
Lastly, he is devoting research efforts to the
life-cycle interactions between education,
labour market performance, and retirement.
Education raises the opportunity costs of
leisure and retirement. Higher labour supply and later retirement raise the returns on
investments in human capital by increasing
its utilisation rate and extending the payback period of the investment.
Hence, there are important life-cycle feedbacks between education, labour supply
and retirement. Taxation not only reduces
labour supply, but also reduces the returns
on human capital investment and makes
early retirement more attractive.
Ulrich Woitek, a professor for economic
history and economics
at the Institute for
Empirical Research in
Economics at the University of Zurich, is
currently at CESifo as
a visiting researcher.
His main areas of
expertise are applied macroeconometrics
and quantitative economic history. He is
involved in projects on the anthropometric history of Switzerland in the 20th
century and on monetary policy issues in
the 1930s. Work on the history of primary school education in Switzerland
with CESifo researchers Josef Falkinger
and Volker Grossmann shows that
accounting for a broader range of sociocultural characteristics qualifies the role
of religion for educational production
well documented in the literature.
Currently, he works on estimation techniques for Dynamic Stochastic General
Equilibrium (DSGE) models. The aim of
this research is to provide econometrically
estimated macroeconomic models which
are useful for policy analysis, incorporating
fiscal and monetary policy into the basic
DSGE framework in a variety of ways.
Mr Jacobs also shows that stronger interactions over the life-cycle drive up the elasticities of all behavioural margins. Consequently, deadweight losses of taxation are
much larger than commonly understood.
Indeed, Prescott may well be right in blaming high levels of taxation for poor labour
market performance in continental Europe.
Recent work with CESifo researchers Jim
Malley and Apostolis Philippopoulos
examines the quantitative macroeconomic
implications of countercyclical fiscal policy for France, Germany and the UK. The
model incorporates real-wage rigidity,
which is the particular market failure justifying policy intervention. A formal general
equilibrium welfare assessment of the
volatility implications of alternative instrument/target combinations reveals the welfare gains from active policy, measured as
a share of consumption, to be moderate.
Bas Jacobs is a professor in economics
and public finance at Erasmus University
Rotterdam, and an academic advisor to
the CPB Netherlands Bureau for Economic Policy Research.
Before joining the University of Zurich in
2005, Mr Woitek worked at the Universities of Glasgow and Munich. He received
his doctorate in 1996 from the University
of Munich.
Munich Society for the Promotion of Economic Research (Münchener Gesellschaft zur Förderung der
Wirtschaftswissenschaft, CESifo GmbH) is the international platform of Ludwig-Maximilians University and the Ifo
Institute for Economic Research.
President and CEO: Hans-Werner Sinn
Address: CESifo, Poschingerstr. 5, 81679 Munich (Germany)
Telephone +49 (0) 89/9224-1410, Fax: +49 (0) 89/9224-1409
Editor: Julio C. Saavedra (JS). Ifo News provided by Annette Marquardt (AM).