Preventing permanent transfers under a European Unemployment Insurance: Can a clawback mechanism be the answer? Prof. Dr. Sebastian Dullien Presentation at conference Economic shock absorbers for the Eurozone: Deepening the debate on automatic stabilisers Brussels, June 16, 2014
Outline 1. Background of research 2. Possible design of a claw-back mechanism for Europe 3. Stabilization effect of a European unemployment insurance with claw-backs 4. Conclusions 2 / 17
Background of research Over the past years, debate of introduction of European unemployment insurance as automatic stabilizer One concern: Some countries might become net payers over time Politically, net payments are problematic, hence the question: How to prevent them? 3 / 17
Net overall payment flows for an EMU unemployment insurance scheme by country, in billions of euros, 1995 to 2011 Assumption A Assumption B Belgium 1.1 3.1 Germany 11.2 21.1 Spain -17.4-45.5 France 7.7 3.2 Ireland -1.3-0.9 Italy 7.2 7.4 Netherlands 1.8 11.3 Austria -0.5 2.1 Portugal -0.6 0.2 Finland -1.6-3.9 Greece -1.6-3.1 4 / 17
Possible point of reference: US unemployment insurance Formally, US unemployment insurance has no claw-back mechanism But: Each state is responsible for the solvability of ist own unemployment insurance fund State funds can borrow from federal insurance Individual state s contributions are increased if fund has been in deficit for two years Hence, a de facto claw-back exists 5 / 17
A European unemployment insurance with claw-back: Basics Basic unemployment insurance, following Dullien (2007, 2012, 2014) As a percentage of past income Strict eligibility criteria (length of former employment) Limited benefits (e.g. 50 percent of average past earnings for up to 12 months) Can be topped up by national governments Financed by a contribution on wages 6 / 17
A European unemployment insurance with claw-back: What is different? Claw-back mechanism: Contribution rates differ across countries (set according to unemployment in 1998) Each country s net contributions are accumulated over time If net contributions fall below a certain threshold, contribution rates are increased If net contributions increase above a certain threshold, contribution rates are cut Challenge: How to time changes in contribution rates to prevent pro-cyclicality? 7 / 17
Country assumption: fixed coverage ratio ( Claw- Back A ) assumption: time-varying coverage ratio ( Claw-Back B ) Belgium 0.90% 0.38% Germany 1.15% 0.46% Initial contribution rates under claw-back scenarios, 1999, in % of wages Estonia 0.83% 0.33% Ireland 1.07% 0.43% Greece 1.95% 1.53% Spain 2.89% 1.30% France 1.53% 0.61% Italy 1.61% 0.64% Cyprus 1.09% 1.02% Latvia 1.23% 0.49% Luxembourg 0.45% 0.18% Malta 0.96% 0.38% Netherlands 0.55% 0.22% Austria 1.10% 0.75% Portugal 0.72% 0.29% Slovenia 1.03% 0.75% 8 / 17 Slovakia 1.43% 0.57% Finland 2.60% 1.04%
A European unemployment insurance with claw-back: What is different? Proposal for claw-back specifics: If balance is above 1 percent of GDP for two consecutive years, contribution rates are cut If balance falls below 0 for two consecutive years, contribution raes are increased Contribution rates are changed by 0.3 percent of GDP Minimum contribution rate: 0.1 percent of GDP 9 / 17
Simulation methodology Two different assumptions are made about coverage ratio among the unemployed Stabilization is compared between a hyopthetical situation of a European unemployment insurance with and without claw-back Uniform A vs. Claw-back A Uniform B vs. Claw-back B Measurement of stabilization: Marginal stabilization against potential output (Dullien 2013) 10 / 17
In many cases, stabilization properties are conserved (I): Constant coverage ratios Change Stabilization with and Country Output Gap without claw-back Start Year End year in No claw-back Claw-back Recession recession percentage ( Uniform ( Claw-Back points A ) A ) Spain 2007 2009-6.2 17.8% 21.8% Spain 2011 2012-0.8 31.5% 16.5% France 2008 2009-4.2 4.0% 7.2% Ireland 2008 2009-5.3 11.5% 11.5% Netherlands 2002 2004-1.1 17.2% 17.3% Netherlands 2011 2012-1.4 4.9% 16.0% Portugal 2008 2009-2.7 6.1% 6.1% Portugal 2010 2012-2.9 13.7% 9.8% Greece 2008 2011-10.5 5.5% 7.1% 11 / 17
In many cases, stabilization properties are conserved (II): Variable coverage ratios Change Stabilization with and Country Output Gap without claw-back Start Year End year in No claw-back Claw-back Recession recession percentage ( Uniform ( Claw-Back points A ) A ) Spain 2007 2009-6.2 28.5% 30.7% Spain 2011 2012-0.8 65.2% 47.7% France 2008 2009-4.2 12.5% 9.4% Ireland 2008 2009-5.3 22.6% 22.6% Netherlands 2002 2004-1.1 24.1% 24.1% Netherlands 2011 2012-1.4 11.7% 16.3% Portugal 2008 2009-2.7 13.6% 18.2% Portugal 2010 2012-2.9 18.4% 13.9% Greece 2008 2011-10.5 8.0% 5.6% 12 / 17
Why does stabilization increase in some cases? Often, lagged cut in contribution rates has coincided with recession Countries paying a higher contribution rate see a larger net change in a recession (as contributions fall more strongly) This is not an effect one can systemically build upon! 13 / 17
percent of GDP What about net payments? The case of Spain 3,0% 2,0% 1,0% 0,0% -1,0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-2,0% -3,0% Uniform A Uniform B Claw-back A Claw-back B -4,0% -5,0% -6,0% -7,0% -8,0% 14 / 17
percent of GDP What about net payments? The case of Greece 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% -1,0% -1,5% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Uniform A Uniform B Claw-back A Claw-back B -2,0% -2,5% -3,0% -3,5% 15 / 17
percent of GDP What about net payments? The case of the Netherlands 4,0% 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% Uniform A Uniform B Claw-back A Claw-back B 0,5% 0,0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-0,5% -1,0% 16 / 17
percent of GDP What about net payments? The case of Germany 1,6% 1,4% 1,2% 1,0% 0,8% 0,6% 0,4% Uniform A Uniform B Claw-back A Claw-back B 0,2% 0,0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-0,2% -0,4% 17 / 17
Conclusions Introducing a claw-back mechanism Allows to limit the risk of permanent transfers but leads to the loss of some stabilization impact, especially in long recessions Yet, politically, it might make the proposal more acceptable 18 / 17