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Equilibrium unemployment and employment in Sweden


Title: The equilibrium rate of unemployment Author: anders forslund Description: IFAU905E v 1.2 2005-02-04 Last modified by: anders forslund Created Date – PowerPoint PPT presentation

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Title: Equilibrium unemployment and employment in Sweden

Equilibrium unemployment and employment in Sweden
A review
  • Anders Forslund
  • 2008-01-29

  • Estimates of equilibrium unemployment in Sweden
  • Government reforms and equilibrium

Estimates of equilibrium unemployment
  • Six studies (that I am aware of) estimate
    equilibrium unemployment (EU) only two of them
    for more recent years
  • All studies indicate that EU has gone up since
    the early 1980s, most of them indicate that the
    rise took place in the early 1990s (one
  • The most recent estimates (NIER) suggest that EU
    has gone up by slightly more than 2 percentage
    points and approx. equals 6 (ILO definition)

Government reforms and EU
  • Two main areas where reforms may be expected to
    have affected EU
  • Unemployment insurance
  • Income taxes

Unemployment insurance and EU
  • Reforms
  • Replacement rate lowered from day 200 (from 80
    to 70)
  • Daily allowance cap lowered the first 100 days
    (by approx. 7)
  • The expected number of insured days shorter due
    to coordination with active labour market
  • Not completely clear how a comprehensive measure
    should be constructed and what it would show
    (different changes for different groups
    different importance for different margins)

Expected effects at given wages
  • Carling et al (2001) estimated effects on hazards
    from unemployment to employment of lower replace
    rate elasticity 1.6
  • If hazard from work to unemployment is unaffected
    by UI, the elasticity of unemployment w.r.t. UI
    benefits is proportional to the elasticity of the
    hazard from unemployment w.r.t. UI benefits
    proportionality factor equals employment rate
  • Hence, elasticity of unemployment w.r.t. UI
    approx. 1.5
  • This is a lower bound, because wage-setting
    effects, if anything, will amplify effects at
    given wages

Expected effects at given wages an example
  • Given
  • Elasticity1.5
  • EU6
  • Reduction of generosity in UI10
  • Then EU down by 0.8 percentage points

Effects at given wages Timing
  • Effects at given wages arise through changes in
    job search behaviour and may appear rapidly
    results in Carling et al (2001) suggest that
    effects may arise already as a reform is expected

Effects of UI using estimated wage-setting model
  • Forslund et al (2008) estimated wage- and
    price-setting schedules. Take account of general
    equilibrium effects
  • The estimated model can be solved for an
    elasticity of unemployment w.r.t. UI benefits
    this elasticity equals 3
  • Hence, if UI generosity is decreased by 10 and
    EU equals 6, EU is reduced by 1.8 percentage
  • In contrast to the adjustment at given wages,
    this adjustment takes considerable time

Income tax reforms
  • Reforms
  • Lower marginal and average (labour) income tax
    rates at low income tax brackets
  • Small changes in marginal tax rates at higher
    income tax brackets, lower average income tax
    rates at higher brackets
  • Income taxes reduced by 6.5 at annual labour
    income SEK 100 000, 5.1 at SEK 150 000

Expected effects on (un)employment
  • I disregard effects on hours worked, although
    they may be important for welfare assessments
  • No direct estimates of effects of taxes on labour
    force participation/unemployment available for
    Sweden to my knowledge. What to do?
  • Use estimated effects of changes in UI the same
    margin affected (relative gain from working), or
  • Use estimates of participation elasticity from
    other countries

Expected effects on (un)employment (cont.)
  • Effects for unemployed persons
  • The tax cut equals approx. 5
  • Hence, given the same line of reasoning as for
    the cuts in UI benefits, EU should be reduced by
    around .4 percentage points at given wage rates

Expected effects on (un)employment (cont. 2)
  • Effects on labour force non-participants (using
    estimated effects of UI changes)
  • Assume that new entrants will be unemployed to
    the same extent as persons already in the labour
  • Then labour supply would increase by approx. 8
    and 5 of these would become unemployed the rest

Expected effects on (un)employment (cont. 3)
  • Effects on labour force non-participants (using
    estimated effects from other countries)
  • In a survey, Krueger Meyer (2002) claim that
    the best guess about the participation elasticity
    is that it equals one
  • If this guesstimate is correct, labour supply
    would instead increase by approx. 5

Expected effects on (un)employment (cont. 4)
  • However, income tax effect will be moderated if
    wages increase
  • Previous studies of swedish wage setting suggest
    that if taxes are lowered by x, wages will
    increase by almost x, leaving wage costs almost
    unchanged. If so, equilibrium will involve a
    larger fraction of unemployed than the supply
    response would suggest
  • However, unclear how much bearing aggregate
    studies have on the effects of selective tax cuts
  • For example, new entrants are outsiders and it
    is not clear how tax cuts targeted at such groups
    affect wage setting

Concluding remarks
  • Estimates suggest that EU may be around 6.
    However, large uncertainty
  • One reliable estimate would suggest a lower
    number some of the most recent estimates suggest
    higher numbers
  • The effects of recent reforms in UI and income
    taxes may have non-trivial effects on EU and
    employment rates. Adding effects under most
    optimistic assumptions gives a guesstimate of
    the effect on EU just above two percentage
    points employment as a share of working age
    population would increase by more

Concluding remarks (cont.)
  • However, once again, large uncertainty
  • Small number of studies
  • Not clear exactly how large the changes have been
  • Effects of taxes on participation largely unknown
    territory in terms of empirical studies
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