Inequality, Unemployment and the Chimera of Labour Market Reform A Presentation to the Treasury Wellington, New Zealand September 29, 2005
by James K. Galbraith The University of Texas Inequality Project http://utip.gov.utexas.edu Based on an article, “Inequality, Unemployment and the Policy of Europe, 1984-2000 co-authored with Enrique Garcilazo published in Banca Nazionale del Lavoro Quarterly Review No. 228, March 2004
The Standard View • Employment is determined in a labour market. • Labour markets are primarily national. • National institutions matter. • Flexibility reduces unemployment. • The United States has more jobs than Europe, but only at the expense of more inequality . • But… is this actually true?
“Data! Data! Data! I can’t make bricks without clay.” Sherlock Holmes The Adventure of the Copper Beeches In this case, we need a data set that permits to assess whether variations in unemployment are primarily due to local, national or international factors.
European Regional Panel Data Set • Pay across Sectors by European Region • From Eurostat’s REGIO • Annual 1984-2000, up to 159 Regions • Enables us to compute measures of inequality within and between regions. • Permits construction of a panel with which we can isolate regional, national and continental effects
A Simple Theory of European Unemployment at the Regional Level • Demand Factors: – GDP Growth (-) (Investment & Construction) – Relative Wealth (-) (Demand for Services; Reflects EU Integration) • Supply Factors: – Youth Population Share (+) (Transition to work) – Inequalities of Pay (+) (Rehn-Meidner; Harris-Todaro) Plus: Country and Time Fixed Effects, Capturing Country-specific Institutions and Common International Factors, respectively.
General Technique for Computing Inequality Measures We use Theil’s T statistic, measured across sectors, and sometimes across provinces or regions as well, to show the evolution of economic inequality. The components of the statistic provide a measure of the contribution of each “province-sector cell” to inequality. This measure takes account both of the relative income of the cell and its size in relation to the whole employed population . The method permits us to map changes in the flow of incomes across regions and across sectors very accurately through time, without relying on sample surveys.
A brief review of the Theil Statistic: The “ “Between Between- -Groups Component Groups Component” ” The ⎧ m m ∑ ∑ = + ⎪ T p R log R p R T j j j j j j ⎪ = = j 1 j 1 ⎨ ⎪ 1 ∑ = ⎪ T r log r j i i n ⎩ ∈ i g j j = μ j n = j R j p μ j n μ n ~ employment; ~ average income; j ~ subscript denoting group
Contribution of European Provinces to Inequality Across the European continent, late 1990s. Im p o v e ris h e d F a r B e lo w A v e ra ge B e lo w A v e ra g e L o w lo w N e utra l L o w N e u tra l N e u tra l H ig h N e u tra l A b o v e A v e ra g e P ro s p e ro u s W e a lth y
Contribution of European Provinces to Inequality Across the European continent, late 1990s.
Regression analysis of European unemployment (Two-way fixed effects panel) Table 2. Coefficient Estimates: Linear Model - (1984-2000). Total Male Female < 25 Yrs > 25 Yrs Beta Pvalue Beta Pvalue Beta Pvalue Beta Pvalue Beta Pvalue Theil 4.969 0.039 3.221 0.126 6.805 0.039 11.967 0.032 4.081 0.042 57.019 0.000 50.581 0.000 76.462 0.000 112.319 0.000 38.037 0.000 PopUn24 RelWage -7.085 0.000 -4.951 0.000 -9.907 0.000 -6.371 0.004 -7.434 0.000 -4.485 0.025 -5.670 0.001 -2.347 0.393 -6.299 0.175 -4.687 0.005 G-GDP R^2 0.6140 0.5869 0.6535 0.6172 0.5831 1465 1465 1465 1465 1465 N Table 3. Analysis of Variance Explained Under Different Specifications. Beta Pvalue Beta Pvalue Beta Pvalue Beta Pvalue Theil 4.027 0.180 4.808 0.039 5.393 0.087 4.969 0.039 PopUn24 50.205 0.000 48.640 0.000 54.227 0.000 57.019 0.000 RelWage -2.816 0.000 -6.809 0.000 -2.210 0.002 -7.085 0.000 -11.830 0.000 -8.561 0.000 -9.494 0.001 -4.485 0.025 G-GDP Regional X X X X Country X X Time X X 0.1644 0.5702 0.2057 0.6140 R^2
Country Fixed Effects Show the Differences Between Countries Not Explained by the Explanatory Variables. These May Interpreted as “Labour Market Institutions” Centralized wage bargains? All Workers -11 - -5 Few major differences -4 separate the large countries -3 - 3 4 - 5 Emigration?
Table A7. Ratio of Austrian to German Average Wages, by Major Sectors 1995 1996 1997 1998 1999 2000 1.04 1.01 1.01 1.06 1.09 0.98 Mining and quarrying Manufacturing 0.88 0.88 0.88 0.89 0.92 0.86 1.22 1.19 1.21 1.26 1.22 1.14 Electricity, gas and water supply Construction 1.04 1.03 1.06 1.11 1.27 1.20 1.03 1.00 1.03 1.07 1.18 1.14 Transport, storage and communication Financial intermediation 1.06 1.07 1.08 1.09 1.23 1.18 0.99 0.96 0.94 0.90 1.09 0.95 Real estate, renting and business activities Public administration and defence; compulsory social security 1.16 1.15 1.13 1.10 1.12 1.12 The Inflexibility Advantage : Austria’s centralized wage bargains permit them to discount labour in traded goods, and import full employment from Germany. (Ditto Ireland and the UK).
Ireland has a similar relationship to the UK, not quite so effectively done… Table A8. Ratio of Irish to British Average Wages, by Major Sectors 1995 1996 1997 1998 Mining and quarrying 0.71 1.05 0.86 0.87 Manufacturing 0.81 0.84 0.75 0.71 Electricity, gas and water supply 0.74 0.65 0.70 0.63 Construction 1.32 1.27 1.17 1.11 1.35 1.39 1.32 1.29 Wholesale and retail trade,* 1.15 1.05 0.97 0.90 Hotels and restaurants 0.79 0.87 0.76 0.70 Transport, storage and communication Financial intermediation 1.51 1.49 1.20 1.11 Real estate, renting and business activities 1.19 1.13 1.07 1.02 Public administration and defence,** 1.08 1.17 1.11 1.18 Education 1.27 1.30 1.17 1.10 Health and social work 1.52 1.48 1.39 1.22 0.97 0.90 0.66 0.57 Other community, social, personal service activities * repair of motor vehicles, motorcycles and personal and household goods **compulsory social security
Total Male Female <25 Yrs >25 Yrs BE 1.540 -0.353 5.164 -2.436 2.298 DE 3.315 4.115 2.965 -7.587 3.926 GR -5.200 -5.123 -3.640 1.450 -6.821 ES 5.036 3.704 8.960 9.707 2.859 IE -9.695 -6.479 -14.570 -24.117 -7.472 IT 0.528 -0.235 3.460 9.279 -1.692 NL -3.694 -3.162 -4.031 -12.998 -2.790 AT -6.030 -4.896 -7.053 -17.094 -5.118 PT -10.786 -8.246 -13.855 -16.812 -10.432 FI 0.904 3.257 -1.974 3.300 0.423 SE -1.059 1.882 -4.414 -3.699 -0.948 UK -4.095 -0.281 -9.089 -12.636 -3.496
Time Fixed Effects Show the Common Movements of Unemployment Across All Regions: This is the Macroeconomic Dimension! European Effects 8 Unemployment Growth and Stability pact 6 4 Maastricht Treaty 2 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -2 -4 Single European Act Birth of the Euro -6 -8 Years Total Male Female <25 Yrs >25 Yrs
The U.S. Case In the U.S. Case, it is necessary to distinguish between income inequality, which rose sharply in the 1990s, and inequalities of pay which did not.
Income inequality in the United States, 1969-2000 Three Measures .045 Inequality per capita personal income btw-county 44 42 .04 Gini coefficient .035 40 38 .03 36 .025 34 .02 1970 1980 1990 2000 year... EHII 2.2 D&S Inequality per capita personal income btw-county
Pay Inequality in the U.S. • We have measured inequalities of pay (weekly earnings) in the manufacturing sector on a monthly basis going back to January, 1947, for sectors that are continuously measured since that time. The result gives us a time series of pay inequalities in a key part of the American industrial economy. It ignores income from capital and pay in the high-tech sector, which are almost entirely responsible for rising income inequality in the U.S. in the late 1990s. It is reasonably similar to the patterns in service pay, which encompass more workers but are harder to measure.
Wage Inequality and Some Historical Events Recession Vietnam War Recession Recession Korean Recession War Recession TRUMAN EISENHOWER JFK LBJ NIXON FORD CARTER REAGAN BUSH CLINTON
Wage Inequality and Unemployment Open Unemployment Rate Did the U.S. reach full employment by increasing pay gaps? No, it did not.
The U.S and Europe • Is the U.S really more unequal than Europe? • First, let’s compare U.S. income inequality to that in each European country. • Then, let’s compare U.S. pay inequality to that in Europe-as-a-whole.
EHII -- Estimated Household Income Inequality for OECD Countries GBR LUX DEU NLD FRA AUT BEL ITA USA ESP GRC 1999 45 1963 1999 1998 1996 1963 1999 1963 1989 1999 1967 40 1999 1999 1999 Gini coefficient 1997 1998 1999 1963 1963 1998 1999 1992 1999 1963 1968 1963 1963 35 1994 1963 1963 1996 1998 1977 1963 1994 1963 1963 1963 1998 1963 1963 30 1963 1963 1963 25 SWE DNK FIN NOR AUS ISL NZL CAN JPN IRL PRT Low High
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