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Alesina, Alberto

Article Europe

NBER Reporter Online

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Suggested Citation: Alesina, Alberto (2006) : Europe, NBER Reporter Online, National Bureau of Economic Research (NBER), Cambridge, MA, Iss. Summer 2006, pp. 8-10

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Europe

Alberto Alesina*

Per capita income in Continental United States. United States. Europe was slower to cap- Western Europe (in short, Europe) was There are three reasons why work ture the benefits of the technological rev- catching up with the United States from hours per person are lower in Europe: ) olution in information technology (IT). the end of the Second World War until fewer people are in the labor force (early Part of the reason was lack of competition the mid-980s; from 950 to about 975, retirements, lower worker participation, in the product and, especially, the ser- we speak of a European miracle. Then, delayed entry into the labor force, all in vice markets. The slow pace of deregula- something changed. The United States various combinations depending on the tion in these sectors created disincentives re-emerged from the difficult decades of country); 2) more vacation time for those to innovation and investment. An early the 970s with a renewed political energy who do work; 3) lower hours in a “nor- deregulation in the980s, restructuring that led to deregulation, increased compe- mal” work week. In different propor- of companies, and a new generation of tition, reduction of marginal tax rates, and tions for different countries, all three fac- aggressive and powerful CEOs in the restructuring of corporations, which later tors matter. For instance, in Italy the first United States created the fertile ground facilitated the immediate adoption of the factor, lower participation, is the driving on which the IT revolution could gener- innovations from the information revo- force. In France and Germany, all three ate an exceptional period of rapid growth. lution. Europe, instead, seemed “stuck:” factors explain about a third each of the In Europe, instead, incumbent firms con- incapable of gathering sufficient energy difference with the United States. tinued with the old practice of govern- to reform itself. This was especially the Europeans are working less and less ment protection from competition and case for the largest countries: Germany, for three reasons: first, increasing mar- government hidden subsidies. France, Italy, and Spain. ginal tax rates (especially from the 960s The second major rigidity in Europe to the 980s); second, a preference for is, of course, in the labor market. Firing What Happened? leisure; and, third, labor regulation and costs interfere with firms’ decisions, mak- union-imposed standards for work time, ing them cautious about hiring. Rather Let’s start with the basics. One of the including retirement regulations. Social than removing these impediments (and most remarkable facts about Europeans is multipliers compounds these effects: introducing well thought out unemploy- that they work much less than Americans. if a family member or friend has more ment insurance schemes), several coun- Europeans worked more than Americans time off, your own benefit from leisure tries, especially France, seem unable to in the 950s and 960s, when they were increases, creating more social demand reform. Europeans remain enamored of lowering their heads in the war recon- for leisure. When it becomes the social “job security” which often means “secu- struction efforts, first, and then during norm, because of regulations requiring six rity” for those insiders who have a job a period of boom. But then Europeans weeks of vacation, or retirement at age 60 and no work for those who are not “in”. began to work fewer and fewer hours per because the law imposes it, then it is diffi- Progress in this direction, achieved in capita. While in the early 970s hours cult to change people’s minds about what Denmark and Sweden, both of which worked per person were about the same is “fair”. have vastly reduced firing costs, has been in Europe and in the United States, today Working less and maintaining reason- immediately followed by a significant the French, German, and Italians work able growth rates is possible if your produc- reduction in unemployment. about 400 hours per person per year ver- tivity increases at a healthy pace. In fact, In summary, you can work less and sus about 800 hours per person in the this has been the case for several decades less and not fall behind if you are more in Europe in the 950s, 960s, and later and more productive when you work. * Alesina is a Research Associate in the through the 980s. So, Europeans man- But several countries in Europe may have NBER’s Programs on Public Economics, aged to keep up with the United States pushed this too far, and their policies Monetary Economics, Political Economy, and Economic Fluctuations and Growth. by working less but being more and more are not sufficiently productivity enhanc- He is also a professor of economics at productive. But in the 990s, European ing. Perhaps Europeans have more or less Harvard University. productivity growth fell below that of the consciously “chosen” to grow less than

8 NBER Reporter Summer 2006 the United States and to fall behind eco- to “plan,” and a favorable view of gov- more “political argument” was put for- nomically and, as a consequence, politi- ernment dictated policies for achieving a ward in favor of the Euro: the common cally, but this does not seem to be the offi- multitude of social goals. The second is currency, by shutting down competitive cial rhetoric emanating from European the resistance of national governments to devaluations as a temporary “drug” for a capitals. truly open their markets, a resistance that national economy, would have facilitated has created obstacles to those European the adoption of structural reforms in the The Role of the EU leaders who indeed understood the ben- labor, goods, and service markets. Thus efits of competition. In European capitals, far it has not quite worked, certainly not Has the European Union been able often one hears a grand pro-European everywhere and with the necessary speed. to increase competition and move the rhetoric, but as soon as non-domestic (but Labor and goods market reforms, with continent to market-friendly growth- European) firms try to acquire domestic the exception of a few northern coun- enhancing reforms? The record is mixed. ones, the European rhetoric is immedi- tries, have been very slow to materialize On the one hand, some progress has been ately forgotten and nationalistic protec- and encounter great political opposition achieved in the area of trade, government tion resurfaces. of two types. One is that of “insiders” subsidies, and goods markets. But, on who fear losing their privileges. Think the other hand, Europe remains full of And the Euro? of incumbent protected firms, unionized impediments to free market competition workers with job security, service provid- across national boundaries, especially in Overall, the first six years of the Euro ers sheltered by international competi- the service sectors and when it comes to have confirmed the pros and cons that tion, banks protected by foreign acquisi- mergers and acquisition. 2 economists had identified regarding the tions, and so on. The second stems from Rather than concentrating on this construction of an average monetary the general European public, which by critical point of a common and truly con- union.5 The Euro has eliminated the pos- and large is “ideologically” averse to free tinental free market, EU institutions have sibility of competitive devaluations that, market thinking. In fact, Europe, espe- vested much energy in areas that are better in the end, cause inflation and has vastly cially France, seems to be embracing more left to national governments. An excessive reduced the risk premise of government and more protectionist policies when it tendency to “coordinate” and “plan” in debt of highly indebted countries, such comes to foreign competition; and the Brussels has led to inconclusive rhetoric as Italy. It also has facilitated financial Anglo-American pro-market approach is and displaced efforts.3 One prime exam- market integration and possibly inter- viewed more and more suspiciously. These ple of this is the glorified “Lisbon process” regional trade and may have increased tendencies are ingrained in European cul- that sets detailed targets on socioeco- cross-national price competition. ture and reflect the history of ideas of this nomic variables, identical for all countries On the other hand, it has imposed continent.6 in Europe, and all to be reached within the same monetary policy on all country Europeans talk about a “European a certain time period. For example, the members. As it turns out, the economic model,” something that Germans refer Lisbon targets specify how many children cycles of countries in “Euro land” have to as a “social market economy,” and they of different age groups should be in public been less correlated than one might have contrast it to the Anglo-American free childcare facilities in 200 in all European predicted; therefore, the common mon- market model. Unfortunately, much of Union countries, what the women’s par- etary policy does not indeed fit all coun- this thinking about a “European model” ticipation rate should be in the labor tries at all times. The European Central is fuzzy and ends up facilitating politi- force, and so on. Another example is the Bank has been repeatedly accused of cal compromises with privileged insid- “obsession” with the coordination of fis- checking European growth and com- ers. Europe does not have to adopt the cal policy imbedded in the details of the pared negatively to the pro-growth poli- American model; it certainly can have Growth and Stability Pact.4 The need cies of the Federal Reserve Bank of Alan something distinct from it, say a system for tight coordination of fiscal policy in Greenspan. However, these criticisms of of efficient competitive markets coupled a monetary union has been vastly over- the European Central Bank are almost with extensive but efficient redistributive emphasized. Part of the problem is that totally misplaced. First, this institution is programs and social protection. Northern certain countries historically incapable of often a convenient scapegoat for govern- European countries are moving in this keeping the fiscal house in order (like Italy ments that do not have the will or courage direction, but the major European coun- and Greece) needed to be “constrained” to implement reforms. Second, these criti- tries are far from it. In these countries, the with some external commitments, but cisms come from the misplaced view that combination of regulation, protectionism, lately even France and Germany have vio- the European sluggish growth problem is high tax rates, and redistributive programs lated these budget rules. demand driven and that monetary policy end up creating unnecessary distortion Why did EU institutions make this could have helped in this regard. and often directing flows of resources not mistake, namely focusing on excessive Above and beyond the economic to the truly needy but to politically pow- coordination? There are two reasons: one arguments in favor or against a momen- erful categories. Measure of effectiveness is, in part, a typical European tendency tary union in Europe, an additional of welfare states in moving in the desired

NBER Reporter Summer 2006 9 direction for income flows from rich to Schucknecht, “What Does the European 6 A. Alesina and M. Angeletos, poor vary dramatically across European Union Do?” NBER Working Paper No. “Fairness and Distribution: U.S. versus countries; northern European countries 87, December 2001, published in Europe,” NBER Working Paper No. 9502, do relatively well, Mediterranean coun- Public Choice, June 2005, pp. 275–319; February 2003, published in American tries are the worst. Lack of swift reforms A. Alesina and R. Wacziarg, “Is Europe Economic Review, September 2005, in many European countries does not Going Too Far?” NBER Working Paper pp. 913–35; A. Alesina, R. Di Tella, depend only on the inability of their lead- No. 883, January 1999, published in and R. McCulloch, “Inequality and ers. Europeans themselves remain very Carnegie Rochester Conference Volume, Happiness: Are Europeans and Americans suspicious of market liberalization. An supplement of Journal of Monetary Different?” NBER Working Paper No. interesting case in this respect is Germany. Economics, December 1999, pp. 1–2. 8198, April 2001, published in Journal This country has received recently the 3 A. Alesina and R. Perotti, “The of Public Economics, May 200, pp. “political shock” due to the assimilation European Union: A Politically Incorrect 837–931; A. Alesina, E. Glaeser, and of former East Germans. Evidence shows View,” NBER Working Paper No. 1032, B. Sacerdote, “Why Doesn’t the U.S. that their Communist experience has March 200, published in Journal of Have a European-Style Welfare System?” accustomed them to extensive govern- Economic Perspectives, Winter 200, pp. NBER Working Paper No. 852, October ment intervention and, as a result, they 2–8. 2001, published in Brookings Paper on have moved the preference of the average 4 A. Alesina, I. Angeloni, and F. Etro, Economic Activity, Fall 2001, pp.178– German in this direction.7 Europe faces “International Unions,” published in 287; A. Alesina, S. Danninger, and M. great challenges in the near future. The American Economic Review, June 2005, Rostagno, “Redistribution through Public need for reforms is clear; the political will pp. 02–15. Employment: The Case of Italy,” NBER is lacking. 5 A. Alesina and R. Barro, “Currency Working Paper No. 7387, October 1999, Unions,” NBER Working Paper No. published in IMF Staff Papers, December  A. Alesina, S. Ardagna, G. Nicoletti, 7927, September 2000, published in 2001, pp.7–73. and F. Schiantarelli, “Regulation and Quarterly Journal of Economics, May 7 A. Alesina and N. Fuchs-Schuendeln, Investment,” NBER Working Paper No. 2002, pp. 09–30; A. Alesina, R. Barro, “Good Bye Lenin (or not?) — The Effect 950, March 2003, published in the and S. Tenreyro, “Optimal Currency of Communism on People’s Preferences,” Journal of the European Economic Areas,” NBER Working Paper No. NBER Working Paper No. 11700, Association, June 2005, pp. 791–825. 9072, July 2002, published in NBER October 2005. 2 See A. Alesina, I. Angeloni, and L. Macroeconomic Annual, 2002.

Consumer Demand for Health Insurance

Thomas C. Buchmueller*

Since the early 990s, prominent pro- of health plans on the basis of price and Although a “managed competition” posals for health insurance reform have quality. Proponents of these market-ori- model has yet to be adopted as national focused on increasing consumer choice ented plans argue that, in such a system, policy, many large employers organize and competition among integrated health consumers will sort themselves into lower their health benefits programs accord- plans. Under “managed competition” cost, higher quality plans; this pressure by ing to the same basic principles. Research models, consumers choose from a menu consumers will provide strong incentives on the behavior of employees and retir- to health plans and their affiliated provid- ees in these employer programs provides * Buchmueller is a Research Associate in ers to control costs and increase quality a useful laboratory for the role of price the NBER’s Programs in Health Care and Health Economics and a Professor of in order to compete for enrollment. The and quality in consumer health insurance Economic and Public Policy at the Paul Clinton administration’s Health Security decisions. Merage School of Business, University of Act and the “premium support” propos- One distinct problem for market-ori- California, Irvine. His profile appears later als for reforming Medicare are variants ented solutions to health insurance is that, in this issue. of the managed competition approach. when consumers are offered a choice of

10 NBER Reporter Summer 2006