1. Political Economics Riccardo Puglisi Lecture 4 Content: Welfare State: Facts, Data and Relevant Issues Economic Policies Size and Composition of the Welfare State Labor Market Issues Economic and Politico-Economic Approach Citizens’ Opinions

2. Economic Policies  Government Expenditure:  Welfare State (Transfers)  Consumption  Investments  Taxation:  Direct taxes (Labor and Capital Income, Corporate taxes)  Indirect  Contributions

3. Other Economic Policies  Regulations:  Labor market  Good market  Financial market  Trade policy  Government Production: State owned firms  Other Public Goods:  Defense  Legal system  Judiciary system

4. Size of the Government: Expenditure Source: Author’s calculation from OECD Economic Outlook Database (No. 71, Vol. 2002 Release 01) June 2002

5. Size of the Government: Revenues 19811987199319992004 AUSTRALIA-- 30,428,6 BELGIUM49,853,554,656,954,2 CANADA24,729,030,831,132,3 DENMARK42,747,746,944,541,5 FINLAND42,445,549,347,443,7 FRANCE---48,147,4 GERMANY41,945,146,451,950,7 IRELAND34,742,740,032,423,8 ITALY47,349,449,247,145,7 JAPAN17,321,421,224,026,6 NETHERLANDS48,349,545,744,343,6 NORWAY43,142,636,837,336,9 PORTUGAL29,934,533,333,432,6 SPAIN37,437,938,037,438,0 SWEDEN50,851,745,650,548,0 SWITZERLAND29,128,528,729,828,8 UNITED KINGDOM 37,636,032,630,831,2 UNITED STATES35,330,631,231,129,6 Tax Wedge (including employer’s social security contributions)

6. Size of the Welfare State Welfare State Expenditure on GDP

7. Composition of the Welfare State

10. Regulation: Labour market  Union’s Relevant Features:  Density  Coverage  Centralization  Employment Protection Legislature  Labor Income Taxation

11. Labour Market: Unions Density \1Coverage\2Centralization \3 France9,195,0 2,0 Germany29,092,0 2,0 Spain21,178,02,0 Italy23,782,02,0 United States14,318,01,0 Japan24,021,01,0 European Union43,182,31,9 \1 Percentage of workers enrolled in a union \2 Percentage of workers whose wage is determined by the union \3 Degree of Centralization of the wage Bargaining 1 at firm level, 3 central Source: OCSE, 1999

12. Labour Market: EPL

13. Labour Market: Taxation Social Contributions\1Tax Burden\2 France3963,8 Germany2353 Spain3354,2 Italy40,262,9 United States20,943,8 Japan16,536,3 European Union \33458 \1 includes contributions to pension, health care and unemployment insurance \2 includes contributions, income and consumption taxes. \3 average on France, Germany, Spain and Italy. Source: Nickell and Layard, 1999.

14. Labour Market: Unemployment, 2000 European Union Austria5,0 Belgium8,3 Denmark5,4 Finland9,2 France9,8 Germany8,5 Greece10,3 Ireland3,6 Italy11,0 Luxemburg2,8 Netherlands2,5 European Union Portugal4,1 Spain14,1 Sweden4,8 UK5,7 Other Industrialized Countries Australia6,7 Canada6,8 New Zeland6,1 USA4,0 Source: OECD Economic Outlook, July 2000.

15. Economic Approach Government Intervention because of “market failures”  Public Goods (non-rival in consumption, non-excludible), [ex. light house, parks, railroad, legal system, defense]  Externalities [ex. pollution]  Asymmetric information  Adverse Selection [ex. health care, social security]  Moral Hazard [ex. health care, insurance provisions]  Natural Monopoly [ex. energy providers]

16. Economic Approach and Welfare State  Equity considerations  Paternalistic view  Asymmetric information (Adverse selection)  Insurance

17. Political Economics Approach  Our focus: Welfare State and Labor Market  Lines of redistribution:  Income: Rich and Poor  Age: Young and Old  Employment Status: Insiders and Outsiders  Factors of production: Labor and Capital

18. Citizens Opinions: Welfare State