The capitalist welfare state

A year ago I published a short paper in Migration Letters. The idea was basically to examine what factors that can explain the pattern that (in most OECD-countries) immigrants have lower employment and higher unemployment than natives. Because there are almost as many theories as there are OECD countries, I used Bayesian model averaging to basically have stata run all possible regressions combining the explanatory variables (starting from row 7) below.

In the paper, the main question is how immigrants fare relative to natives, so native (un)employment is always included, whereas the other x-variables may or may not belong in the model, and the algorithm will calculate a posterior inclusion probability for each variable, and a coefficient for the variable when included.

The main result is that the share of the labor market covered by collective bargaining agreements does far better than other variables, especially for explaining unemployment among immigrants. Based on the bma-results, I discovered the following very simple model for explaining unemployment among immigrants in OECD:

In words: A model containing unemployment rate for natives and the share of the labor market that is covered by collective bargaining agreements can explain 73% of the variation in immigrant unemployment in a cross-section of OECD-countries. 10 pcu higher collective bargaining coverage is associated with 0.9 pcu higher immigrant unemployment rate.

Some have asked me if the same variables explain immigrants' labor market outcomes without controlling for natives' labormarket unemployment. In Sweden, immigrants have relatively high employment compared to other countries, but the gap between immigrant and natives is much larger in Sweden than in most other countries.

While I believe that analyzing the gap between immigrants and natives is a more appropriate research question for the method and the variables tested, it is easy to apply the bayesian algorithm to the same data without controlling for natives (un)employment. For those who are curious, the results are shown below. As explained in the paper, I test two sample sizes (with 21 and 25 countries) because some x-variables are available for relatively few countries. The variables are ranked according to posterior inclusion probability (pip), and before that the coefficient is shown.

Explaining immigrant unemployment

N=21

N = 25

Explaining immigrant employment

N = 21

N = 25

Collective bargaining agreement coverage is still the variable that best explains immigrant unemployment. Employment protection laws (as quantified by OECD's strictness index from 0 to 6) also seem to matter. Both varaibles have the expected sign (given that expectations are that immigrants will have lower unemployment on more flexible labor markets)

For employment, intolerance matters: In countries where the share who prefers not to have immigrant neighbors is higher, immigrant employment is lower (most likely reflecting the fact that the nordic countries are highly tolerant and also have high employment rates, especially for women)

Link to datafile (stata)

Stumbled over this course, introduced as follows:

One core question permeates political economy scholarship: how is it possible to combine capitalism (free markets) with democracy (collective choice)? One produces stark inequalities in the distribution of income and wealth, whilst the other (the democratic state), in principle, is based on egalitarianism (one person, one vote).

The comparison between capitalism and democracy made here (and in many other places...) is not really fair. Why? Because the (alleged) consequences of capitalism (inequality) are contrasted with the founding principle of democracy (egalitarianism). A more informative comparison would be to compare consequences of capitalism with consequences of democracy, and similarly compare foundations of capitalism with the foundations of democracy.

Doing so reveals that they share some features: The are both, in fact, based on egalitarianism (everyone's right to property and everyone's right to some political rights) and they both result in some inequality (democratic influence and profits will typically not be uniformly distributed).

Still, both systems are doing ok when compared to their alternatives, socialism and dictatorship.

Here are my slides from my presentation at the American Public Choice Society meeting in New Orleans, March 2-4. Full paper is here.

My latest piece on Sweden is out now in the Milken Review. This time I try to say something about how and why Sweden became the country it is today. Previously, I have focused on what happened, when did it happened and what the consequences were. Saying something about why it happened is much more difficult. In short, it is easy to paint a picture of wise intentional planning in retrospect, but that is typically not true when you look closer at what really happened. Serendipity and unintended consequences played important roles.

From the introduction:

The winding road Sweden has taken has made it difficult to say whether being more like Sweden involves increasing taxes and government intervention in the economy – or whether it means liberalization, deregulation and welfare-state retrenchment. So, before other countries try too hard to become more like Sweden, it is wise to look back at how Sweden came to be Sweden.

An example, based on the research of Thor Berger:

Historians point to the early introduction of mass public education, with the adoption of the 1842 Elementary School Act. The law, which stipulated that every parish must have at least one school, is often mentioned by contemporary politicians as a shining example of Sweden's long commitment to investment in human capital. The policy implication is seemingly clear: political decisions promoted growth early on by mandating public education. That may well be the case. But before jumping to that conclusion it is worth considering the analysis offered by the economic historian Thor Berger of Lund University. [...]

In short, education promoted economic development in Sweden, but democracy at the time did not promote education. Knowing more about what actually happened in Sweden hardly leads to clearer recommendations for other countries.

A new paper (together with Margareta Dackehag and Martin Rode) is now forthcoming in the EJPE: "Are OECD policy recommendations for public sector reform biased against welfare states? Evidence from a new database". The paper introduces a database that summarizes the policy advice in the OECD publication Economic Surveys. We show that the policy advice given in these surveys can be summarized as a kind of 'Washington Consensus' for welfare states, and that the interest in different types of reforms have varied over time:

We quantifiy the perceived reform need and examine its correlates, which led to an interesting discovery: The reform need according to the OECD is highly correlated with the Fraser Institute's Economic freedom index.

We also examine if perceived reform need predicts subsequent policychanges. Using the Comparative Welfare State Entitlement dataset, we find some evidence that a high reform need is followed by lower welfare state entitlements in countries with a right-wing government, and higher entitlements in countries with a left-wing governments - but these results are not causal, ie these changes may well have ocurred regardless of what OECD recommends.

The database is available here.

Can inferior institutions destroy social trust? In a recent working paper (w Richard Öhrvall) we shed some new light on this question by studying social trust among Swedish expatriates in different types of countries. Obviously, Swedish expatriates are strongly self-selected (as we confirm in the paper, mainly on subjective health), so our main interest is in whether length of stay tend to affect trust differently in countries with different types of institutions.

As (perhaps) expected, it does. But the effect is driven entirely by those who were young when they moved to the new country.

The graphs below show how social trust (measured on a 0-10 scale, corrected for individual characteristics) varies with how long the respondent has lived in the new country. Worst, middle and best refer to the destination countries divided into thirds based on their score in the corruption perception index.

What we see is that for those who were older than 30 at the time of arrival, social trust is remarkably stable. Even in the most corrupt destination countries, swedish expats who have lived there several decades are as trusting as those who only just arrived. Among expats that were 30 or less, there is a marked decrease in trust for those who have lived longer in the most corrupt countries. Note however that after 10 years, there is no evidence of a further decline.

(Graphs look similar if we instead use legal quality as measured by the second dimension of the economic freedom index).

Here is the top of yet another country ranking:

3. Switzerland — 77.00. Switzerland stands on its own at the heart of Europe despite not being a member of the EU. It is known for its banks and high standard of living, and skiing in the Alps attracts people from all over.

2. Canada — 77.82. Canada is high on the list of countries people would love to immigrate to. With a tolerant culture, a strong economy, and high levels of healthcare it is no wonder.

1. Sweden — 78.34. Sweden has it all: high-quality exports, a tolerant society, low crime, beautiful cities to visit, a high standard of living, a mild climate, and a strong sense of business. It could well top the list for years to come.

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Released aug 12, 2016 is the following title

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Good news: Sweden and the Revival of the Capitalist Welfare State will be published in paperback this fall, with an affordable price (32 dollar/20 pounds). Order here :-)