Title: Equilibrium unemployment and employment in Sweden
1Equilibrium unemployment and employment in Sweden
A review
- Anders Forslund
- 2008-01-29
2Outline
- Estimates of equilibrium unemployment in Sweden
- Government reforms and equilibrium
unemployment/employment
3Estimates 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
exception) - The most recent estimates (NIER) suggest that EU
has gone up by slightly more than 2 percentage
points and approx. equals 6 (ILO definition)
4Government reforms and EU
- Two main areas where reforms may be expected to
have affected EU - Unemployment insurance
- Income taxes
5Unemployment 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
programmes - 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)
6Expected 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
7Expected effects at given wages an example
- Given
- Elasticity1.5
- EU6
- Reduction of generosity in UI10
- Then EU down by 0.8 percentage points
8Effects 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
9Effects 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
points - In contrast to the adjustment at given wages,
this adjustment takes considerable time
10Income 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
11Expected 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
12Expected 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
13Expected 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
force - Then labour supply would increase by approx. 8
and 5 of these would become unemployed the rest
employed
14Expected 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
15Expected 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
16Concluding 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
17Concluding 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