nep-eec New Economics Papers
on European Economics
Issue of 2006‒05‒27
27 papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. The Euro and Financial Integration By Philip Lane; Sébastien Wälti
  2. Have European Stocks Become More Volatile? An Empirical Investigation of Idiosyncratic and Market Risk in the Euro Area By Colm Kearney; Valerio Poti
  3. Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank By Bernd Hayo; Boris Hofmann
  4. Monetary Policy and Inflation Divergences in a Heterogeneous Monetary Union By Patrick Villieu; Nelly Gregoriadis; Florina Semenescu
  5. Investing for the long-run in European real estate By Carolina Fugazza; Massimo Guidolin; Giovanna Nicodano
  6. Explaining the Euro's Effect on Trade? Interest Rates in an Augmented Gravity Equation By Tommaso Mancini Griffoli
  7. A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro By Lindblad, Hans; Sellin, Peter
  8. Optimal regional biases in ECB interest rate setting By Ivo J.M. Arnold
  9. Sector diversification during crises: A European perspective By Michel Beine; Pierre-Yves Preumont; Ariane Szafarz
  10. Life insurance securitisation in Europe: An overview on the effects of alternative capital resources and its relation to regulator and IFRS guidelines. By Pieter Walhof*; André B. Dorsman; André Thibeault
  11. Gender and the Division of Household Labor in Older Couples: A European Perspective By Karsten Hank; Hendrik Jürges
  12. Disparities in Pension Financing in Europe: Economic and Financial Consequences By Jean Chateau; Xavier Chojnicki
  13. Is There a Glass Ceiling over Europe? Exploring the Gender Pay Gap across the Wages Distribution By Wiji Arulampalam; Alison Booth; Mark L. Bryan
  14. The single European electricity market: A long road to convergence By François Coppens; David Vivet
  15. A Knowledge Economy Paradigm and its Consequences By Soete, Luc
  16. How globalised really is European trade? By T. Huw Edwards
  17. Tax Rates with Corruption: Labour-market Effects. Empirical Cross-country Comparisons on OECD Countries By Mária Lackó
  18. The role of EBA in the political economy of CAP reform By Alan Matthews; Jacques Gallezot
  19. Legal diversity and regulatory competition: which model for Europe? By Simon Deakin
  20. The political economy of European federalism By Jean Michel Josselin (CREM - CNRS); Alain Marciano (University of Reims – CNRS – EconomiX – IDEP)
  21. An Optional European Contract Law Code: Advantages and Disadvantages By Wolfgang Kerber
  22. Competition Policy with Optimally Differentiated Rules Instead of "Per se Rules vs. Rule of Reason" By Arndt Christiansen and Wolfgang Kerber
  23. Integration Of Smaller European Equity Markets : A Time-Varying Integration Score Analysis By Gregory Birg; Brian M. Lucey
  24. Skill Biased Technological Change and Endogenous Benefits: The Dynamics of Unemployment and Wage Inequality By Matthias Weiss; Alfred Garloff
  25. Income Taxes and Entrepreneurial Choice : Empirical Evidence from Germany By Frank M. Fossen; Viktor Steiner
  26. Personal assets and pension reform: How well prepared are the Germans? By Axel Börsch-Supan; Lothar Essig
  27. Income Inequality in the 1990s : Comparing the United States, Great Britain and Germany By Richard V. Burkhauser; Ludmila Rovba

  1. By: Philip Lane; Sébastien Wälti
    Abstract: We provide a quantitative analysis of the impact of the euro on European financial integration. We consider both volume- and price-based indicators. In general, we find evidence that common membership of the euro area strengthens bilateral financial linkages. However, we emphasize that EMU has only been one innovation driving European financial integration in recent years, with global factors also increasingly important.
    Date: 2006–05–25
  2. By: Colm Kearney; Valerio Poti
    Abstract: We examine the dynamics of idiosyncratic risk, market risk and return correlations in European equity markets using weekly observations from 3515 stocks listed in the 12 Euro area stock markets over the period 1974-2004. Similarly to Campbell, Lettau, Malkiel and Xu (2001), we find a rise in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to the United States , however, market risk is trended upwards in Europe and correlations are not trended downwards. Both the volatility and correlation measures are pro-cyclical, and they rise during times of low market returns. Market and average idiosyncratic volatility jointly predict market wide returns, and the latter impact upon both market and idiosyncratic volatility. This has asset pricing and risk management implications.
    Keywords: Idiosyncratic risk, correlation, portfolio management, asset pricing
    Date: 2006–05–23
  3. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet MarburgAuthor-Name: Boris Hofmann); Boris Hofmann (Zentrum für Europäische Integrationsforschung, University of Bonn, Walter-Flex-Str. 3, D-53113 Bonn, Germany)
    Abstract: This paper compares the ECB’s conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1-2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion.
    Keywords: Taylor rule, monetary policy, ECB, Bundesbank
    JEL: E5
    Date: 2005
  4. By: Patrick Villieu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Nelly Gregoriadis (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Florina Semenescu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: It is widely recognized that the Euro area is an asymmetric monetary union which assembles countries with heterogeneous structures on financial, goods and labour markets stricken by asymmetric shocks. However, the main objective of the European Central Bank (ECB) is to preserve price stability for the euro area as a whole, and the ECB pays most of its attention to union-wide output and (principally) inflation, neglecting, at least on the level of principles, inflation and output divergences in union. In this paper, we wonder, at a theoretical level, about the social loss associated with such an objective based on aggregate magnitudes, and we search for solutions, namely an “optimal” contract for a common central bank. We show in particular that it is not necessarily a good thing that a common central bank worries about inflation divergences without being concerned about output divergences in union.
    Keywords: Monetary Policy ; Monetary Union ; Heterogeneity, Optimal Contract ; Inflation Divergences
    Date: 2006–05–23
  5. By: Carolina Fugazza; Massimo Guidolin; Giovanna Nicodano
    Abstract: We calculate optimal portfolio choices for a long-horizon, risk-averse investor who diversifies among European stocks, bonds, real estate, and cash, when excess asset returns are predictable. Simulations are performed for scenarios involving different risk aversion levels, horizons, and statistical models capturing predictability in risk premia. Importantly, under one of the scenarios, the investor takes into account the parameter uncertainty implied by the use of estimated coefficients to characterize predictability. We find that real estate ought to play a significant role in optimal portfolio choices, with weights between 12 and 44 percent. Under plausible assumptions, the welfare costs of either ignoring predictability or restricting portfolio choices to traditional financial assets only are found to be in the order of 150-300 basis points per year. These results are robust to changes in the benchmarks and in the statistical framework.
    Keywords: Real estate investment ; Rate of return ; European Union
    Date: 2006
  6. By: Tommaso Mancini Griffoli (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: If the Euro has boosted intra Euro-Area trade, what exactly in the new currency is responsible for such an effect? Most explanations focus on a decrease in exchange rate volatility or in transaction costs, receiving mixed empirical support. After briefly surveying the relevant literature, this paper points to a novel channel of transmission: the sharp decrease in real interest rates that accompanied the Euro. The argument is that lower interest rates spurred investment spending and manufacturing value added, as in Flam and Helpman (1987), and induced a greater number for firms to enter the export market, ultimately boosting trade. This phenomenon is captured in a simple model with fixed costs, where the number of firms or varieties supported in a market is endogenous. The model is used to augment the traditional trade gravity equation. In the end, empirical results are presented in support of the interest rate's role at explaining the "Rose effect".
    Keywords: Gravity equation, International Trade, Common Currency, Instability tests in Panel data, Euro Area.
    JEL: F1 F4 C23 C52
    Date: 2006–05
  7. By: Lindblad, Hans (Sveriges Riksdag); Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper we simultaneously estimate the real exchange rates between the Swedish Krona, the US Dollar and the Euro. A prime candidate for explaining the exchange rate movements is relative potential output. Since this variable is unobservable, cyclical and potential output are estimated in an unobserved components framework together with a Phillips curve. Our empirical exchange rate results are in line with theory. Increases in relative potential output and the terms of trade strengthen the exchange rate, while a relative increase of the fraction of middle-aged people in the population and budget deficits depreciate the exchange rate. The estimates suggest that the recent deterioration of the relative budget situation for the US versus Europe is a prime candidate for explaining the USD/EUR exchange rate change lately.
    Keywords: Equilibrium real exchange rate; expectations augmented Phillips curve; unobserved-components model
    JEL: C32 E31 F31 F41
    Date: 2006–05–01
  8. By: Ivo J.M. Arnold (Nyenrode Business Universiteit)
    Abstract: This paper uses a simple model of optimal monetary policy to consider whether the influence of national output and inflation rates on ECB interest rate setting should equal a country’s weight in the eurozone economy. The findings depend on assumptions regarding interest rate elasticities, exchange rate elasticities, and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have strong trading ties with non-eurozone countries. Intuitively, these countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners.
    Keywords: EMU, Taylor rule; Optimal monetary poli
    Date: 2005
  9. By: Michel Beine (Université du Luxembourg and DULBEA, Université libre de Bruxelles, Brussels.); Pierre-Yves Preumont; Ariane Szafarz (CEB (SBS) and DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: The dynamics of the cross-correlations between the 10 Dow Jones European sector financial indices are analyzed through to the Dynamic Conditional Correlations (DCC) model during the period 1987-2003. First, the paper confirms that, on the whole, the correlations are highly volatile. Second, it brings insights on the behavior of the sector correlations during the IT bubble. The comparison of the pre- and post-bubble periods leads to the conclusion that the sector indices do not suffer from the contagion effects (a correlation increase damaging the portfolio diversification) observed by several authors on country indices. Therefore, it is argued that the benefits from sector diversification during crises must be taken into account by portfolio managers.
    Keywords: dynamic correlation, sector diversification, IT bubble, contagion
    JEL: G11 G15 C32
    Date: 2005–02
  10. By: Pieter Walhof*; André B. Dorsman; André Thibeault (Nyenrode Business Universiteit)
    Abstract: Recently Life Insurance Securitisation practices have been probed in dedicated areas to access the wider capital markets. These developments have shown a rising interest among leading insurers and reinsurers to start building experience with securitisation practices, either for risk transfer, raising additional capital or a combination of these. As these structures have proven to be cost effective and generally accepted in the banking segment it is foreseen that securitisation can become an accepted method in insurance environments too in the foreseeable future. This paper provides an overview of recent practices in Life Insurance Securitisation and aims to demonstrate that Life Insurance Securitisation has viable potential for insurance companies in the future to reduce the cost of (regulatory) capital and transferring risk to the capital markets.
    Keywords: Life Insurance Securitisation, risk transfer, capital raising
    Date: 2005
  11. By: Karsten Hank; Hendrik Jürges (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: Using micro-data from the 2004 ‘Survey of Health, Ageing and Retirement in Europe’ (SHARE), this study investigates the division of household labor in older couples (aged 50+) in a cross-national perspective. Across ten continental European countries, we find considerable variation in the overall distribution of housework between partners. One may roughly distinguish between more egalitarian countries in northern Europe and more traditional countries in the southern parts of Europe. A multivariate analysis shows that the observed spatial pattern is neither due to differences in population composition, nor due to country-specific effects of individual characteristics. We do find a significant effect of macro-level gender inequalities on couples’ division of housework, though. In addition, our analysis suggests the presence of relevant further, though unobserved contextual effects. The paper concludes with suggestions for future research.
    Date: 2005–06–09
  12. By: Jean Chateau; Xavier Chojnicki
    Abstract: We present a quantitative analysis of the impact of differential ageing and pension reforms on capital and labour market and, in particular, on intra-European capital flows. To this end, we develop a stylized general equilibrium model with overlapping generations of heterogeneous agents for the three largest European countries: France, Germany and the United-Kingdom. The model presents a structure halfway between pure general equilibrium models with rigorous microeconomic foundations accounting models where the macroeconomic environment remains exogenous. We show that the dynamics of capital accumulation and pension system sustainability are totally different depending on the assumption concerning economic openness. Two main conclusions may be drawn from the examination of the various prospective scenarios. First of all, the critical assumptions for PAYG systems are the future trend of the global factor productivity and the behavior of agents concerning activity and labour market participation. Secondly, in the long run, resorting to debt financing seems to be a dead end to finance retirement systems.
    Keywords: Public pensions; ageing; computable general equilibrium model
    JEL: H55 J1 C68
    Date: 2006–05
  13. By: Wiji Arulampalam; Alison Booth; Mark L. Bryan
    Abstract: Using harmonised data from the European Union Household Panel, we analyse gender pay gaps by sector across the wages distribution for eleven countries. We find that the mean gender pay gap in the raw data typically hides large variations in the gap across the wages distribution. We use quantile regression techniques to control for the effects of individual and job characteristics at different points of the distribution, and calculate the part of the gap attributable to differing returns between men and women. We find that, first, gender pay gaps are typically bigger at the top of the wage distribution, a finding that is consistent with the existence of glass ceilings. Second, for some countries gender pay gaps are also bigger at the bottom of the wage distribution, a finding that is consistent with sticky floors. Third, the gender pay gap is typically higher at the top than the bottom end of the wage distribution, suggesting that glass ceilings are more prevalent than sticky floors. Fourth, the gender pay gap differs significantly across the public and the private sector wages distribution for each of our EU countries.
    Keywords: glass ceilings, sticky floors, quantile regression, public sector, gender pay gaps.
    JEL: J16 J31 J7
    Date: 2006–01
  14. By: François Coppens (National Bank of Belgium, Microeconomic information Department); David Vivet (National Bank of Belgium, Microeconomic information Department)
    Abstract: In the context of a first Working Paper the authors argued that electricity has a number of characteristics that set it apart from other commodities. It was demonstrated that some of these characteristics might complicate the deregulation process. This paper analyses the ongoing deregulation process in the European electricity sector and attempts to establish whether these difficulties can more readily be solved at European level. It would appear that some problems, e.g. economies of scale in electricity generation, have less of an impact at European level than within smaller national markets. However, a number of difficulties have to be overcome before a unified European electricity market can become a reality. These include the limited interconnection capacities between Member States. The European Commission has taken steps to improve the situation, for example by offering financial support for investments and promoting the development of regional markets as an interim measure ultimately leading to a fully integrated market. Apart from the difficulties related to electricity generation and transmission there are also exogenous factors that influence the ongoing deregulation process, e.g. the implementation of the Kyoto protocol and the dramatic increases in primary fuel prices. This paper argues that a consistent, stable and uniform European regulatory framework must be put in place if the impact of these difficulties is to be minimised.
    Keywords: Electricity deregulation
    JEL: L94
    Date: 2006–05
  15. By: Soete, Luc (United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology)
    Abstract: During the 1980s and 1990s "Active labour" market reforms opened up labour markets in Europe, making them more flexible without putting in jeopardy the essence of the social security protection model. Countries that went furthest in such "active labour" market reforms such as the UK, the Scandinavian countries, and the Netherlands witnessed not just reductions in unemployment, but also impressive increases in employment participation rates, particularly among underrepresented groups in the labour market. The challenge today appears more or less similar, but this time with respect to knowledge. Interestingly, it is those EU Member States that have succeeded most in "activating" their labour markets and developing better functioning social welfare models that have performed best in terms of knowledge investments. This suggests, that success in boosting knowledge investment generates the public resources for the development of social welfare models capable of addressing rapid change, and in particular the global changes of the 21st Century.
    Keywords: Knowledge, Human Capital, Investment, Social Welfare, Technological Change, Social Change, Globalisation
    JEL: O31 O38 O15 I38 J61
    Date: 2006
  16. By: T. Huw Edwards (Loughborough University)
    Abstract: Using a new set of measures of concentration of trade, I suggest that the opening up of trade to date has been greatly exaggerated. At least judging on the basis of trade concentration, agriculture and service sectors should barely be seen as globalised at all. Contrary to other recent studies, Europe's main economies lag behind the USA in terms of global openness, and most are behind Japan, Canada and China. The Balkans, Poland and Czech Republic are near the bottom end of the global openness league table. Since there is a strong correlation between concentration of trade and poor economic performance, this should be of concern to those countries and to the European Union.
    Keywords: Globalisation, Regional Integration, Trade, Europe.
    JEL: F10 F15 C49
    Date: 2006–05
  17. By: Mária Lackó (Institute of Economics, Hungarian Academy of Sciences)
    Abstract: The paper investigates how tax rates, corruption and institutional aspects of the labour market influence the size of the segments of the labour market such as unemployment, employment, self-employment and activity in the hidden economy. The novelty of our approach is the theoretical justification of the interaction between the perception of taxes and of corruption, as well as the establishment of a new concept and variable, the subjective tax rate. Alternative regression calculations are carried out on data for OECD countries for the period 1995 to 2000. The tests confirm the validity of the new variable and the results imply the need for a more sophisticated policy approach for influencing labour market outcomes.
    Keywords: Taxation, corruption, labour market, hidden economy
    JEL: D73 J2 H26
    Date: 2006–05–15
  18. By: Alan Matthews; Jacques Gallezot
    Abstract: This paper explores whether the EU’s Everything But Arms (EBA) scheme, under which exports from 50 least developed countries (LDCs) are admitted duty-free to the EU market, influenced the trajectory or pace of Common Agricultural Policy (CAP) reform. It finds no evidence that it played a role except in the case of two products, sugar and rice. The overall volume of exports, or potential exports, from LDCs in CAP products is just too small to create market management difficulties outside of these two products. It could play an indirect role in reform in the future in the context of the Economic Partnership Agreement negotiations between the EU and African, Caribbean and Pacific (ACP) countries under the Cotonou Agreement. ACP countries could use EBA as a benchmark and demand equivalent treatment for their exports in these negotiations in return for liberalising their markets towards EU exports. Any move to extend more generous preferential access to non-LDC ACP countries for CAP-supported products would have much greater implications for the CAP simply because of their greater supply capacity.
    Keywords: Everything But Arms, Least Developed Countries, sugar, preferences, CAP reform
    Date: 2006–05–23
  19. By: Simon Deakin
    Abstract: Two models of regulatory competition are contrasted, one based on a US pattern of Ôcompetitive federalismÕ, the other a European conception of Ôreflexive harmonisationÕ. In the European context, harmonization of corporate and labour law, contrary to its critics, has been a force for the preservation of diversity, and of an approach to regulatory interaction based on mutual learning between nation states. It is thus paradoxical, and arguably antithetical to the goal of European integration, that this approach is in danger of being undermined by attempts, following the Centros case, to introduce a Delaware-type form of inter-jurisdictional competition into European company law.
    Keywords: corporate law, labour law, regulatory competition
    JEL: K22 K31
    Date: 2006–03
  20. By: Jean Michel Josselin (CREM - CNRS); Alain Marciano (University of Reims – CNRS – EconomiX – IDEP)
    Abstract: In spite of the clear objective assigned to the integration process in the 1950s, the institutional status of the European Union remains ambiguous and uneasy to define. The argument that we present in this article is that Europe has always hesitated between two forms of federalism. We use an agency framework and demonstrate that before the landmark cases Van Gend en Loos and Costa v. E.N.E.L., the European Union is mainly a confederation but it already contains elements of a federation. Afterwards, the institutional structure of the Union evolves towards a more centralised federalism but still shows lasting elements of a confederation.
    Keywords: Federation, confederation, political economy, European Union.
    JEL: D72 H11 K10 N41
    Date: 2006
  21. By: Wolfgang Kerber (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: Should the EU introduce an Optional European Contract Law Code and what should it look like? By applying economic theories of federalism and regulatory competition (legal federalism), it is shown why an Optional Code would be a very suitable legal instrument within a two-level European System of Contract Laws. By allowing private parties choice of law to a certain extent, it can combine the most important advantages of centralisation and decentralisation of competences for legal rules. Through differentiated analyses of three kinds of contract law rules (mandatory substantive rules, mandatory information rules and facilitative law), important conclusions can be reached: which kinds of contract law rules are most suitable to be applied on an optional basis (e.g. facilitative law) and which might be less so (e.g. information regulations). Furthermore a number of additional general conclusions about the design and scope of an Optional EU Code and some conclusions in regard to sales law are derived.
    Keywords: contract law, European Union, legal federalism, regulatory competition
    JEL: H7 K12 K33
    Date: 2006
  22. By: Arndt Christiansen and Wolfgang Kerber (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: Abstract: Both in US antitrust and EU competition policy a development to a broader appli-cation of rule of reason instead of per se rules can be observed. In the European discussion the attempt to base competition policy on a "more economic approach" is mainly viewed as im-proving the economic analysis in the assessment of specific cases. In this paper it is shown from a general law and economics perspective that the application of rules instead of focus-sing on case-by-case analyses can have many advantages (less regulation costs, rent seeking and knowledge problems), although an additional differentiation of rules through a deeper assessment can also have advantages in regard to the reduction of decision errors of type I and II. After introducing the notion of a continuum of more or less differentiated rules, we show - based upon law and economics literature upon the optimal complexity of rules - in a simple model that a competition rule is optimally differentiated, if the marginal reduction of the sum of error costs (as the marginal benefit of differentiation) equals the marginal costs of differen-tiation. This model also allows for a more detailed analysis of the most important determi-nants of the optimal degree of rule-differentia¬tion. From this law and economics perspective, competition policy should consist mainly of (more or less differentiated) rules and should only rarely rely on case-by-case analysis. Therefore the main task of a "more economic ap-proach" is to use economics for the formulation of appropriate competition rules.
    Keywords: Competition Policy, European Competition Law, Rule of Reason
    JEL: K K L
    Date: 2006
  23. By: Gregory Birg; Brian M. Lucey
    Abstract: The objective of this paper is to study capital market integration in smaller european countries and its implications for an international portfolio investment allocation. A time-varying analysis based on Barari (2004) suggests that the markets have recently started moving towards international financial integration. Results vary from country to country and sample countries can be broken down into distinctive groups according to their recent integration score performance: a) countries which are becoming increasingly integrated with both regional European and international equity markets (Estonia, Hungary, Czech Republic, Lithuania, Poland) b) countries which have becoming increasingly integrated with the regional market, while growing segmented with the world market (Latvia, Slovakia, Slovenia). This is an encouraging indicator in that none of the countries have been growing segmented from the European equity markets since the EU accession.
    Keywords: Stock Market Integration, Portfolio Diversification, Smaller European markets, Time-varying methods.
    Date: 2006–05–23
  24. By: Matthias Weiss; Alfred Garloff (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: In this paper, we study the effect of skill-biased technological change on unemployment when benefits are linked to the evolution of average income and when this is not the case. In the former case, an increase in the productivity of skilled workers and hence their wage leads to an increase in average income and hence in benefits. The increased fallback income, in turn, makes unskilled workers ask for higher wages. As higher wages are not justified by respective productivity increases, unemployment rises. More generally, we show that skill-biased technological change leads to increasing unemployment of the unskilled when benefits are endogenous. The model provides a theoretical explanation for diverging developments in wage inequality and unemployment under different social benefits regimes: Analyzing the social legislation in 14 countries, we find that benefits are linked to the evolution of average income in Continental Europe but not in the U.S. and the UK. Given this institutional difference, our model predicts that skill-biased technological change leads to rising unemployment in Continental Europe and rising wage inequality in the U.S. and the UK.
    JEL: E24 J31 O30
    Date: 2005–09–14
  25. By: Frank M. Fossen; Viktor Steiner
    Abstract: Entrepreneurial activity is often regarded as an engine for economic growth and job creation. Through tax policy, governments possess a potential lever to influence the decisions of economic agents to start and close small businesses. In Germany, the top marginal income tax rates were reduced exclusively for entrepreneurs in 1994 and 1999/2000. These tax reforms provided two naturally defined control groups that enable us to exploit the legislation changes as "natural experiments". First, the tax rate reductions did not apply to freelance professionals (Freiberufler), and second, entrepreneurs with earnings below a certain threshold were not affected. Using data from two different sources, the SOEP and the Mikrozensus (LFS), we analyse the effect of the tax cuts on transitions into and out of self-employment and on the rate of self-employment. We apply a "difference-in-difference-in-difference" estimation technique within a discrete time hazard rate model. The results indicate that the decrease in tax rates did not have a significant effect on the self-employment decision.
    Keywords: Taxation, entrepreneurship, natural experiment, difference-in-difference-in-difference estimation
    JEL: H24 H25 J23
    Date: 2006
  26. By: Axel Börsch-Supan; Lothar Essig (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: Demographic change presents major financing problems for the pay-as-you-go pension system. In response to these problems, the 2001 and 2004 German pension reforms reduced the statutory level of benefits from the pay-as-you system. The resulting pension gap is supposed to be filled by funded second and third pillar private pensions. This paper examines the extent to which households are in a position today to close this gap with their personal assets, assuming that they stick to their current saving and asset accumulation behaviour. Four critical factors are relevant to this issue: 1. the anticipated life expectancy, 2. the level of personal assets on retirement 3. the expected age of retirement, and 4. the anticipated interest rate. Our results indicate that about a third of German households will not be able to fill the pension gap unless they were to change their current savings behaviour.
    Date: 2005–06–30
  27. By: Richard V. Burkhauser; Ludmila Rovba
    Abstract: Using data from the March Current Population Surveys in the United States, the Household Panel Survey in Great Britain and the Socio-Economic Panel in Germany we find gains from economic growth in the United States over their 1990s business cycle (1989-2000) were more equitably distributed than were the gains over their 1980s business cycle (1979-1989). Furthermore, they were more equitably distributed than were the gains in Germany over their 1990s business cycle (1991-2001). However, gains from economic growth in Great Britain over their 1990s business cycle (1990-2000) were the most equitably distributed. Our results hold using both summary measures of inequality as well as kernel density estimations. In the United States and Great Britain the entire income distribution moved upward in the 1990s. In Germany, as was the case in the United States over their 1980s business cycle, there was a drop in the middle of the income distribution and increases in both tails. In the United States, younger persons (aged 64 and younger) fared better than older persons (aged 65 and older) while the opposite was the case in Great Britain and Germany. Income inequality fell in all three countries among the older population. But it rose in Germany, remained about the same in the United States and fell in Great Britain among their younger populations.
    Keywords: Income inequality, kernel density estimations, economic well-being, cross-country comparisons
    JEL: D3
    Date: 2006

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