nep-eur New Economics Papers
on Microeconomic European Issues
Issue of 2015‒09‒05
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Decomposing income polarization and tax-benefit changes across 31 European countries and Europe wide, 2004-2012 By Wang, Jinxian; Caminada, Koen; Goudswaard, Kees; Wang, Chen
  2. R&D policies in France: New evidence from a NUTS3 spatial analysis By Montmartin, B.; Herrera, M.; Massard, N.
  3. The effect of public support on R&D employment in small firms By V. DORTET-BERNADET; M. SICSIC
  4. Is there a fade-away effect of initial nonresponse bias in EU-SILC? By Rendtel, Ulrich
  5. Do More of Those in Misery Suffer from Poverty, Unemployment or Mental Illness? By Sarah Flèche; Richard Layard
  6. Getting to the Roots of Long-Term Care Needs: A Regression Tree Analysis By Bassetti, Thomas; Rebba, Vincenzo
  7. Where Does the Surplus Go? Disentangling the Capital-Labor Distributive Conflict By Francesco Bogliacino; Dario Guarascio; Valeria Cirillo
  8. Taxation of Dividend Income and Economic Growth: The Case of Europe By Dackehag, Margareta; Hansson, Åsa
  9. Marital Sorting, Inequality and the Role of Female Labor Supply: Evidence from East and West Germany By Nico Pestel
  10. Clash between national and EU climate policies: The German climate levy as a remedy? By Peterson, Sonja
  11. Stemming the tide. What have EU countries done to support low-wage workers in an era of downward wage pressure? By Sarah Marchal; Ive Marx
  12. Did the Reduction of ICT Investment Due to the 2008 Economic Crisis Affect the Innovation Performance of Firms? By Spyros Arvanitis; Euripidis Loukis
  13. Charitable Behaviour and the Big Five Personality Traits: Evidence from UK Panel Data By Brown, Sarah; Taylor, Karl
  14. Labor Disputes and Job Flows By H. FRAISSE; F. KRAMARZ; C. PROST
  15. Economic incentives versus institutional frictions: migration dynamics within Europe By Chakrabarti, Anindya S.; Dutta, Aparna
  16. Labour Elasticity in V4 countries: Structural decomposition analysis By Martin Lábaj; Karol Morvay; Martin Hudcovský
  17. Performance indicators of the French pension system By Y. DUBOIS; A. MARINO
  18. Country Size and Corporate Tax Rate: Rationale and Empirics By Azémar, Céline; Desbordes, Rodolphe; Wooton, Ian

  1. By: Wang, Jinxian; Caminada, Koen; Goudswaard, Kees; Wang, Chen
    Abstract: Polarization is an interesting additional social indicator for analyzing income inequality and poverty across countries, as it captures the phenomenon of ‘clustering around extreme poles’. Rising income polarization can be harmful since it is closely linked to poverty, social exclusion, social tension and social unrest (Brzezinski, 2013). However, so far little literature has been devoted to the changes in income polarization across countries over time, especially within Europe. Moreover, not much is known about whether and to what extent market income and the tax-transfer system contribute to changes of polarization. This paper provides theoretical and empirical insights into a relatively new dimension of income distribution: polarization. Rising income polarization has been observed outside Europe, but within the EU, polarization is relatively unexplored. We therefore broaden the analysis using micro-data from EU-SILC to 28 EU countries and 3 non-EU countries over the period 2004-2012. The paper estimates income polarization and decomposes the estimated polarization by country clusters, and Europe-wide, using a decomposition technique we developed. The main conclusions are: (1) Income polarization is rather stable over the decade in European countries, and Europe-wide. It was rising among West-EU15 countries in the sub-period 2004-2008, but declining afterwards. The opposite development is witnessed for CEE New Member States. Despite the Great Recession we do not find a sizeable increase in income polarization. (2) The causes of changes in polarization between 2004 and 2012 vary to a large extent across countries – no general pattern is found, although polarization was upward driven by market income (mainly capital income), while tax-benefit systems were polarization-reducing.
    Keywords: income polarization, inequality, poverty, welfare state reform, EU-SILC
    JEL: H53 H55 I32
    Date: 2015–08–17
  2. By: Montmartin, B.; Herrera, M.; Massard, N.
    Abstract: The French policy-mix for R&D and innovation has deeply evolved in recent years and is nowadays, one of the most generous and market-friendly system in the world. This paper investigates the (evolutive) effects of this policy-mix by using a unique database containing information on the amount of R&D tax credit, regional, national and European subsidies received by firms in all French metropolitan NUTS3 regions over the period 2001-2011. By estimating a Spatial Durbin model with regimes and fixed effects, we provide new evidence on the efficiency of the French policy-mix. First, a yardstick competition between NUTS3 regions for R&D investment driven by negative spatial spillovers is found. Second, it seems that national subsidies are the only instrument able to generate a significant leverage effect on privately-financed R&D. Third, due to the context of spatial competition, the three other policies studied (Tax Credit, Regional and European subsidies) do not generate significant leverage or crowding-out effect. Fourth, we highlight the presence of structural breaks in our data that correspond to the last two important reforms of the French tax credit. Consequently, the effect of R&D policies and especially R&D tax credit are likely to change over time and influence ex-post evaluation results.
    JEL: H25 O31
    Date: 2015
  3. By: V. DORTET-BERNADET (Insee); M. SICSIC (Insee)
    Abstract: Between 2003 and 2010, total R&D public support (tax incentives and subsidies) targeted at SMEs increased by more than 300%: in 2010 it amounted to almost 2 billion euros, of which 26% (nearly 500 million euros) were perceived by very small businesses (fewer than 10 employees). This sharp increase is mainly explained by two reforms of the R&D tax credit (in 2004 and 2008) and a new public program dedicated to young innovative enterprises launched in 2004. An aggregate analysis shows that the share of R&D personnel financed by public funding has been multiplied by four for very small businesses, from 14% in 2003 to 49% in 2010. This change was accompanied by a decline of privately funded R&D personnel employed by very small businesses (and other SMEs to a lesser extent). An econometric analysis of a panel of small firms active in R&D intensive sectors tends to confirm this agregate finding at the firm level: R&D public support appears to have a positive impact on highly qualified and R&D employment but the impact on the associated labor costs appears to be significantly lower than the increase of the public financing, particularly from 2008.
    Keywords: R&D tax credit, subsidies, public policy evaluation, difference-in-differences
    JEL: O38 H25 C23
    Date: 2015
  4. By: Rendtel, Ulrich
    Abstract: Nonresponse in surveys may result in a distortion of the distribution of interest. In a panel survey the participation behavior in later waves is different from the participation behavior at the start. With register data that cover also the information for non-respondents one can observe a fade away of the distributional differences between the distribution of the full sample, including nonresponders, and the respondent sample, without the nonrespondents. The mechanics of this effect may be explained by a Markov chain model. Under suitable regularity conditions the distribution on the state space converges to the steady state distribution of the chain, which is independent from the starting distribution of the chain. Therefore the fade-away effect is considered here as the swing-in into the steady state distribution. An essential condition for the fade-away effect assumes the same tran- sition law for the responders and the nonresponders. Such a hypothesis is investigated here for the Finnish subsample of EU-SILC for the equival- ized household net-income. The income is grouped into income brackets which divides the starting sample into quintiles. This analysis is based on register information. For this analysis the null-hypothesis of equal transition behavior between income quintiles for responders and nonre- sponders cannot be rejected. This finding restates a result for Finland for the ECHP (European Community Household Panel). A second condition concerns the selectivity of panel attrition after wave one. Here panel attrition must not depend on the income state of the previous panel wave. The velocity of the swing-in into the steady state distribution depends on the stability to stay in the same income state. The stability may vary among the European countries. Therefore we investigated the transition matrices for 25 EU-SILC countries. We simulated 6 different pattern of nonresponse bias and investigated the fade-away effect across the waves 2006 to 2009. We found remarkable differences between these 25 coun- tries. Expressed by the relative bias, i.e. bias in 2009 divided by bias at start in 2006, we found a reduction down to 26 percent of the initial bias for Bulgaria (foremost reduction) up to 61 percent for Finland (least reduction). Our results vote for longer observation periods in rotation panels like EU-SILC.
    Keywords: Panel surveys,nonresponse,panel attrition,Markov chains,income mobility,EU-SILC
    Date: 2015
  5. By: Sarah Flèche; Richard Layard
    Abstract: Studies of deprivation usually ignore mental illness. This paper uses household panel data from the USA, Australia, Britain and Germany to broaden the analysis. We ask first how many of those in the lowest levels of life-satisfaction suffer from unemployment, poverty, physical ill health, and mental illness. The largest proportion suffer from mental illness. Multiple regression shows that mental illness is not highly correlated with poverty or unemployment, and that it contributes more to explaining the presence of misery than is explained by either poverty or unemployment. This holds both with and without fixed effects.
    Keywords: Mental health, life-satisfaction, wellbeing, poverty, unemployment
    JEL: I1 I31 I32
    Date: 2015
  6. By: Bassetti, Thomas; Rebba, Vincenzo
    Abstract: This paper investigates the effects of individual and environmental determinants on physical and cognitive impairment of Europeans aged 50 and older using data drawn from the Survey of Health Aging and Retirement in Europe (SHARE). The aim is to understand the different paths that need-related determinants of long-term care might take across individuals. As dependent variables, we consider several measures of physical and cognitive disability which are regressed on a list of covariates which includes biological, health, behavioural, socio-demographic and early-life conditions of individuals. We adopt a methodology that combines the structure of random effects models for longitudinal data with the flexibility of a tree regression method. We show the existence of clusters in the main determinants of functional decline (physical and cognitive). Our findings are in line with the existing literature, but, at the same time, we further characterize previous evidence: 1) cognitive impairment, measured by the results of a memory test, strongly depends on educational attainments, age and respondents’ country of residence; 2) physical impairment, measured through the loss of handgrip strength, basic and instrumental activities of daily living (ADLs, IADLs) and mobility, strongly depends on health and behavioural factors.
    Keywords: Long-term care, physical impairment, cognitive impairment, health behaviour, early-life conditions, RE-EM tree analysis, SHARE.
    JEL: I12 J14 J26
    Date: 2015–08–18
  7. By: Francesco Bogliacino; Dario Guarascio; Valeria Cirillo
    Abstract: The evidence on growing inequality in OECD countries has raised an important debate over its main drivers, pointing out an increasing importance of capital-labour conflict. In this contribution, we aim at disentangling the role of some of the forces shaping this process. Our identification strategy relies on the sequential nature of wage setting and profits realization, in line with theoretical insights from the range theory of wages (postulating rents sharing at the shop floor level) and the principle of effective demand. In particular we focus on the role of technology and offshoring as instruments to create surplus and to shape the bargaining power of the parties involved in wage setting, and on different sources of demand as heterogeneous determinants of profits realization. The empirical analysis is performed on a panel of 38 manufacturing and service sectors over four time periods from 1995 to 2010, covering Germany, France, Italy, Spain, and United Kingdom. The contrasting effects of R&D and offshoring emerge as determinants of wages. Investment and internal demands are key variables in the realization of profits. When we look at the heterogeneity of the effects we see three main stylized facts. First of all, distinguishing for technological domain using Pavitt classes we can see that rents are effectively related with upgraded industries. Secondly, when we distinguish for the degree of openness we can see that, again, rents are mainly shared in open industries. Finally, when we disentangle the effect on wages per skill level, it is possible to confirm the intuition that offshoring hits the medium-low skill categories.
    Keywords: rent; surplus; distribution; inequality; offshoring; R&D
    JEL: O33 F15 J31
    Date: 2015–08–19
  8. By: Dackehag, Margareta (Department of Economics, Lund University); Hansson, Åsa (Department of Economics, Lund University)
    Abstract: More recently researchers have turned to analyze how the tax structure, rather than the overall tax level, affects economic performance. For instance, several papers have investigated how taxation on corporate and individual (labor) income influences growth. Taxation of dividend income may also influence growth via its impact on investments and firm behavior. Within the academic community there is conflicting views about the impact taxation of dividends has on firm behavior and, hence, on economic performance. According to the “traditional view”, taxation of dividends is distortionary and increases the cost of equity. According to the “new view”, taxation of dividends does not influence the marginal cost of capital and consequently has no impact on investment decisions. To our knowledge, this paper is the first study to explore how tax rates on dividends affect economic growth, by using panel data from 1990 till 2008 for 18 European countries. We find that taxation of dividend income negatively influences economic growth, a result that corroborates the old view of dividends taxation as distortionary and also has some policy implication for the European countries in question.
    Keywords: Economic growth; taxation of corporate income; taxation of personal income
    JEL: H21 H24 H25 O40
    Date: 2015–08–14
  9. By: Nico Pestel
    Abstract: This paper examines to what extent marital sorting affects cross-sectional earnings inequality in Germany over the past three decades, while explicitly taking into account labor supply choices. Using rich micro data, the observed distribution of couples' earnings is compared to a counterfactual of randomly matched spouses. Hypothetical earnings are predicted based on a structural model of household labor supply. For West Germany, a positive effect of marital sorting on inequality is found after adjusting for labor supply behavior, while the effect is limited when earnings are taken as given. This means that there is positive sorting in earnings potential which is veiled by relatively low female labor force participation. In East Germany, the impact of marital sorting on inequality is highly disequalizing irrespective of adjusting for labor supply choices. This is mainly due to the fact that East German women are much more attached to the labor market.
    Keywords: Earnings inequality, marital sorting, labor supply, Germany
    JEL: D31 D63 J12 J22
    Date: 2015
  10. By: Peterson, Sonja
    Abstract: This policy brief explores the potential scope and optimal design of national climate policies in the European climate policy context. It argues that the recent German proposal of a climate levy for electricity generators (BMWi 2015) has the potential to reconcile EU and national policies. Section 2 starts with a brief introduction into the present EU climate policy regime and the rationale of national climate policies in this framework. The bottom line is that the current setting basically justifies national targets and policies only for the sectors that are not already covered by the European emissions trading scheme (EU ETS). Section 3 discusses the deficiencies of the EU ETS which is the major reason why additional national polices for the EU ETS sectors can still be justified. Section 4 focusses on how such national policies should be designed. Section 5 takes the proposed German climate level as an interesting example of a new type of national policy and discusses how it could be optimized. Section 6 summarizes and concludes.
    Date: 2015
  11. By: Sarah Marchal; Ive Marx
    Abstract: Governments across the EU have been striving to get more people into work while at the same time acknowledging that more needs to be done to ‘make work pay’. Yet this drive comes at a time when structural economic shifts are putting pressure on wages, especially of less skilled workers. This article focuses on trends in minimum wages, income taxes, and work-related benefits within a selection of 16 EU countries, for the period 2001-2012, with three US states included as reference cases. We find evidence for eroding relative minimum wages in various EU countries, yet combined with catch-up growth in the new Member States. We also find that governments counteracted eroding minimum wages through direct income support measures, especially for lone parents. Most prevalent among these were substantial declines in income tax liabilities. More generally we see a trend unfolding towards a fiscalization of income support policies.
    Keywords: social policy, in-work benefits, minimum wages
    JEL: I38
    Date: 2015–08
  12. By: Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Euripidis Loukis (University of Aegean, Samos, Greece)
    Abstract: In this paper we investigate empirically, first, the characteristics of the firms that reduced their ICT investment due to the 2008 crisis, particularly the firms’ ICT-related characteristics in terms of ICT budget, skills and applications used. The analysis of the ICT characteristics that may influence the likelihood of having reduced ICT investment as a consequence of the crisis is primarily explorative, thus driven by available data and economic intuition. The second research question we examine empirically refers to the possibility that an economic crisis could affect innovation performance through the ICT investment channel. In connection with this, it is also interesting to analyze the ICT characteristics that are associated with ICT-enabled innovation performance. This is the third research question of this paper. Our study is based on firm data from the glass/ceramics/cement industry in six European countries. We find that ICT-related crisis vulnerability correlates positively with decreasing ICT budgets (pro-cyclical investment behaviour), the existence of skill deficits in ICT, the awareness of and interest in novel ICT applications that presumably request much additional ICT investment, the exposure to strong price competition and the strong presence in international markets, in which activities have significantly decreased due to the crisis. Further, statistically significant negative relationship between ICT-enabled product innovation and crisis vulnerability (pro-cyclical behaviour) is found only for new products or services that contain ICT components, and are therefore directly affected by crisis-related decreasing product demand. Employment of specialized ICT personnel, ICT outsourcing (only for process innovation), competition (only for product innovation), and the use of some ICT applications specific to the kind of innovation pursued are ICT characteristics that positively correlate with ICT-enabled innovation.
    Keywords: economic crisis, information and communication technologies (ICT), innovation, ICT-enabled innovation
    JEL: O31
    Date: 2015–08
  13. By: Brown, Sarah (University of Sheffield); Taylor, Karl (University of Sheffield)
    Abstract: This paper investigates the association between personality traits and charitable behaviour, namely donations of time and money, using data from Understanding Society, the most recent large scale UK household longitudinal survey. Due to the censored nature of the outcome variables, i.e. some individuals do not engage in charitable behaviour, we employ censored quantile regression models. Personality traits are classified according to the 'Big Five' taxonomy: openness to experience; conscientiousness; extraversion; agreeableness; and neuroticism. The quantile approach allows us to explore the effect of personality traits across the entire distribution of charitable behaviour rather than just at the mean, which has generally been the case in the existing literature. In general, after conditioning on an extensive set of controls, conscientiousness and neuroticism are found to be inversely related to donating time and money, whilst openness to experience, which has a positive effect, is the dominant trait in terms of magnitude. Interestingly, personality traits are found to have a stronger association with donations of time and money at the extreme points of the distribution of donations relative to that at the median, thereby highlighting the additional information revealed by quantile approach.
    Keywords: censored quantile regression, charitable donations, personality traits, volunteering
    JEL: C24 D03 H41 N3
    Date: 2015–08
  14. By: H. FRAISSE (Banque de France and IZA); F. KRAMARZ (Crest,CEPR and IZA); C. PROST (Insee)
    Abstract: This article uses variations in local conditions of the activity of the labor courts to assess the effect of dismissal costs on the labor market. Judicial activity is analyzed using a data set of individual labor disputes brought to French courts over the years 1996 to 2003. Several indicators are computed: the percentage of dismissed workers who litigate in employment tribunals, the fraction of cases leading to a conciliation between parties, to a trial, resulting in a workers victory. First, we present a simple theoretical framework helping us understand the links between litigation costs, judicial outcomes and firing costs. Court outcomes are not exogenous to market conditions but also to litigation costs: a large filing rate can come from small litigation costs for the workers, leading to large dismissal costs for the firms; it may well come from small litigation costs for the firms, the employers taking more risks when firing workers. Second, we regress job flows on indicators of judicial outcomes, using an instrument, based on local shocks in the supply of lawyers. We find that when the numbers of lawyers increase, workers litigate more often, which should increase the firing costs for the firms. This increased filing rate causes a decrease in employment fluctuations, especially for shrinking or exiting firms. The effect on employment growth is positive in the short term.
    Keywords: employment protection legislation, job flows, labor judges, unfair dismissal, France
    JEL: J32 J53 J63 K31
    Date: 2014
  15. By: Chakrabarti, Anindya S.; Dutta, Aparna
    Abstract: The immobility puzzle in European Union takes the form that the observed level of migration within Europe is substantially less than is expected in an union which allows free labor mobility, indicating that there are possibly institutional barriers inhibiting migration. In order to pin down the missing mass of migrants, we propose a theory of cross-region migration in a multi-region setting with heterogeneity in sectoral compositions, productivity and endowments of productive inputs. Migration arises as the result of adjustment process of workers in response to uneven region and sector-specific shocks in factor productivity. When tested on U.S. which we consider to be a benchmark for institutional homogeneity, this model explains substantial part of variability in both the nominal and the relative levels of state-to-state migration. However, for Europe, the model explains the relative ow network well but predicts a higher nominal ow than is seen in the data illustrating the puzzle. Following the hypothesis that heterogeneity across European countries in institutional factors induce a friction on such labor reallocation process driven by economic incentives, we use dyadic regression to analyze the effects of pair-wise institutional distances which broadly captures various types of socio-cultural and political differences between countries, on the missing mass of migrants. Linguistic differences appear to be an important factor explaining the gap.
  16. By: Martin Lábaj (University of Economics in Bratislava, Faculty of National Economy, Department of Economic Policy); Karol Morvay; Martin Hudcovský
    Abstract: In the present paper, we analyse determinants of labour elasticity in V4 countries. While the standard approach relies on the parametric estimation of labour elasticity coefficients, we employ a novel approach based on structural decomposition analysis. This allows us to identify several determinants that mitigate the effects of economic growth on employment. We decompose the overall change in employment into the contribution of six factors: changes in labour productivity, changes in import of intermediate products, changes in the structure of production, changes in the final demand structure by industries and by sectors, and a change in final demand volume. We show that besides generally accepted influence of labour productivity growth on employment other factors such as structural changes and changes in final demand played an important role in employment changes. These results shed some light on low labour elasticity in V4 countries that goes beyond the simple labour productivity growth argument.
    Keywords: structural decomposition analysis, labour elasticity, V4 countries, input-output analysis
    JEL: C67 J21
    Date: 2015–08–27
  17. By: Y. DUBOIS (Insee); A. MARINO (Insee)
    Abstract: Equity and solidarity are main concerns for the French pension system. These concepts are linked with the one of returns: return between generations, between pensioners of the same generation& Returns allow to summarize several dimensions: either related to financial data (pensions and contributions) or durations (activity and retirement). We choose here two indicators: the internal rate of return and the recovery rate. Second, those actuarial indicators should be interpreted with caution. In an intertemporal approach, the choice of the updating rate is crucial. Moreover, how to compare people of different generations who have not known the same growth pace ? The pension system is strongly linked to the economic growth, such a dependence has an impact on the interpretation of the statistics. We use the microsimulation model Destinie 2 that allows us to project pensions in the long run for each individual and, thus, to have all information we need to estimate the indicators: working life duration, social security contributions, pensions and retirement duration. To compute the level of contributions, we have to take account of the diversification of the financing of the french pension system.
    Keywords: pensions, microsimulation, rate of return
    JEL: H55 J26
    Date: 2015
  18. By: Azémar, Céline; Desbordes, Rodolphe; Wooton, Ian
    Abstract: This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member-states for the period 1981-2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.
    Keywords: corporate tax rate; country size; foreign direct investment; tax competition
    JEL: E62 F23 H25
    Date: 2015–08

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