EuropeInstitutional reforms that really matter: OECD institutional indicators vs. Dutch reform history.

Ruud Gerards, Manuel Müllers and Joan Muysken

CofFEE-EuropeMaastricht University, Department of Economics

Presented by Ruud Gerards at AIAS 6 November 2008

http://www.ruudgerards.nl

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Outline

• Methodology

• Dutch reform history

• Econometric evidence

• Comparison with OECD indicators

• Conclusions

• Further research/refinement of research

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IntroductionFigure 1. Social security benefit recipients

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Unemploymentor SocialAssistance

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Dutch Disease

Dutch Miracle

Objectives

• Which reforms have had considerable impact?

• Do OECD institutional indicators correctly pick up these reforms?

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Methodology

• Our methodology builds on Stegeman 2005 (Netherlands bureau for economic policy analysis, CPB)

• In 1980-2003 there were too many reforms to test econometrically

• Qualitative analysis (literature research) gives us pre-selection of reforms

• Econometrics used to test the selection of reforms

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Methodology

• Qualitative analysis

• Fondazione Rodolfo Debenedetti Social Reforms Database

• Brandt et al

• LABREF Labor Market Reforms Database

• OECD economics surveys

• Literature review

• Ranking

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Dutch reform history

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Dutch reform history: Areas and instruments

• Reform areas – Disability– Sickness– Unemployment– ALMP– EPL

• Reform instruments– Level– Responsibility– Access– Duration– Stimuli

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Dutch reform history: Instruments

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Dutch reform history: Impacts

Figure 3. Reform impact ratios by area and instrument

Reform impact ratios by area

sickness Disability Almp epl unemployment

ratio 5/6 8/16 2/26 1/8 8/14

% 83% 50% 8% 13% 57%

Reform impact ratios by instrument

level responsibility access duration stimuli

ratio 3/9 8/18 5/9 1/2 9/38

% 33% 44% 56% 50% 24%

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Econometric evidence: Model

• Two stage error correction model

• Estimation period 1980-2003

• Reforms are represented by dummies

• First stage (long run) equation:

• Second stage (short run) equation:

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Econometric evidence: Dummies

• Reforms represented by Dummies

• Effects of reforms implemented in subsequent years difficult to measure

• Hard to distinguish between the impacts of dummies that are close to each other in time

• To reduce density of dummies some dummies represent multiple reforms

year tba tz tav1980 0 0 01981 0 0 01982 0 0 01983 0 0 01984 0 0 01985 0 0 01986 0 0 01987 0 0 01988 0 0 01989 0 0 01990 0 0 01991 0 0 01992 0 0 0,751993 0,42 0 11994 1 1 11995 1 1 11996 1 1 11997 1 1 11998 1 1 11999 1 1 12000 1 1 12001 1 1 12002 1 1 12003 1 1 1

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Econometric evidence: Method

Variables

levels changes

(long run) (short run)

Dependent variable SR unempl. rate SR unempl. rate

PA Ratio 0.644*** 0.795***

Exemption 57+ and Wassenaar -2.75*** -1.03***

1987 reform -1.31** -0.015

PES reform -1.73** -0.881**

nABW -4.46*** -0.850

Bonus for employment -0.860 -0.650***

Red. of benefit duration -2.58* -0.034

Flexwet -1.37* -0.157

Business Cycle indicator   -0.483***

R2 0.846  0.841

N 27 27

*** = significant at 1%, ** = significant at 5%, * = significant at 10%

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Econometric evidence: Conclusions

• Econometric analysis confirms results from qualitative analysis

• Strong empirical evidence for the role of the business cycle

• Unemployment countercyclical

• Sickness and disability pro-cyclical

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Do OECD indicators correctly reflect our findings?

OECD * Allard 2005

Overall strictness of protection against

(individual) dismissals in regular jobs

Overall strictness of regulation on

temporary employment

Overall EPL strictness version 1

Overall EPL strictness version 2

EPL score

1980-1982 2,2 1983-1987 2,6

1988 2,1 1989 2,1 1990 3,08 2,38 2,73 2,1

1991-1994 2,1 1995 2,3 1996 2,1 1997 2,1 1998 3,05 1,19 2,12 2,27 2,4

1999-2002 2,4 2003 3,05 1,19 2,12 2,27 2,4

* Retrieved from OECD statistics website 5 Nov. 2007

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Do OECD indicators correctly reflect our findings?Figure 3*. Total public spending on Active labour market programs

*Based on data from the OECD Social Expenditures Database

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Do OECD indicators correctly reflect our findings?Figure 4*. OECD Unemployment replacement rate indicators

* Based on OECD and CPB data

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OECD unemploymentbenefit RR 1st year

OECD unemploymentbenefit RR 2nd and 3rdyears

OECD unemploymentbenefit RR 4th and 5thyears

CPB unemploymentbenefit (WW)replacement rate

CPB averagereplacement rate

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Do OECD indicators correctly reflect our findings?

• Disability and sickness hardly discussed in the OECD literature

• No OECD indicators for disability and sickness

• Indicators on EPL and unemployment benefit replacement rates perform not so well

• ALMP indicator performs reasonably well

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Conclusions• Policy conclusions

– EPL and ALMP policy relatively unsuccessful

– Sickness, disability and unemployment reforms relatively successful

– Political business cycle influences reform timing

• OECD indicator conclusions

– OECD indicators do not perform that well, except ALMP indicator

– Sickness and disability not covered by OECD indicators

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Further research/refinement of research

• We did not take into account tax-based reforms

• Regress all reform efforts at total number of claimants

• There is a certain amount of subjectivity in the ranking of reforms in the qualitative analysis– Ideas for improvement??

• Maybe count and analyse newspaper citations on these reforms?

• Possible selection bias?– Yes maybe, but: econometrics used only to confirm results of

qualitative analysis and this it does.– Covariates would have become significant instead of the reforms

• Repeat this analysis for more countries