Altavilla (2004) finds differences in the timing of EMU members’ business cycles at the inception of the euro, and more recent evidence suggests that business cycle convergence among eurozone countries during the 1990s ended roughly with the introduction of the euro (Crespo-Cuaresma/Fernandez-Amador 2013).
Any additional benefits beyond those guaranteed by the EMU-level fund and financed by the 1.5 percent payroll tax directed to the EMU-level fund, would be financed and administered by an additional payroll tax at the domestic level.
Using Eurostat data, we extract the seasonal component of unemployment by subtracting the quarterly seasonally adjusted unemployment rate from the non-seasonally adjusted data. We then calculate the ratio of the seasonal component of unemployment relative to short-run unemployment.
Five EMU countries (Austria, Cyprus, Finland, Germany, and Italy) do not have a minimum wage for the relevant period, although Germany instituted one in 2015 that we utilize for the projections. On average across EMU countries, the minimum wage is approximately 50 percent of the average wage. For these five countries we therefore construct a shadow minimum wage, utilizing the average relationship in each year between average wages and minimum wages in other EMU countries. Note that median wage data are unavailable. Use of mean, rather than median, wages biases the cost calculations towards fiscal infeasibility, given that mean wages – and, thus, benefit levels based on mean wages – are skewed upward in unequal economies.
Estonia, Latvia, and Slovakia (plus Slovenia, under certain circumstances) currently pay 50 percent of earnings.
The size of the fund shown in Figure 1 and the final column of Table 3 is calculated with a 2 percent discount rate. Note, however, that we have not assigned a return to the accumulated funds in the system, despite the fact that these funds may be invested to earn, for example, a risk-free rate of return. To account for returns earned on the accumulated funds in the system, we can instead calculate the stock of the fund with a 0 percent discount rate, assuming that the risk-free rate of return is approximately equal to the discount rate. For comparability, calculations with a 0 percent discount rate are shown in Table 3, column 4.
The projected deficit with 46 percent minimum wage replacement is, however, quite small – particularly in 2016–2017 (0.34 billion in 2016 and 1.69 billion in 2017) – and is sensitive to assumptions used in the projections regarding the reincorporation of short- versus long-term unemployed into the labor force during recoveries, which are explained in the Appendix.
An increase in the size of the fund can either be generated via increases in the taxable wage base, or in the payroll tax, and the chosen combination of these parameters influences the distributional consequences of the policy. In particular, funding the system via a relatively higher cap on income subject to payroll tax (higher taxable wage base) and a relatively lower payroll tax increases the progressivity of the tax system financing the scheme.
With a 1.5 percent payroll tax, on the other hand, 50 percent minimum wage replacement is not possible for any values of the taxable wage base less than or equal to 90 percent.
There are also stricter eligibility requirements, for example, in the Netherlands, which provides individuals with benefits on the basis of prior job tenure. Unfortunately, these types of eligibility requirements cannot be captured in the aggregate data.
The only exception is Finland, for which net beneficiary status in 2012 remains constant from 2011, despite positive growth in 2011 and a contraction in 2012.
The stimulus effect relies on an underlying assumption that any reduction in a country's deficit due to the UI scheme allows national governments to increase their spending accordingly, by an equal amount. In other words, if countries chose to run smaller fiscal deficits, rather than redirect discretionary fiscal policy to other purposes, the stabilization effect would be ‘small or non-existent … [although a] benefit in this case might arise from the reduced public debt level and the consequent positive confidence effect’ (Claeys et al. 2014: 4).
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Appendix Construction of dataset
The calculations in this paper utilize data from AMECO, Eurostat, and the IMF's World Economic Outlook. Data for gross wages, total compensation of employees, the number of unemployed, and GDP deflators are from AMECO for 1999–2014. AMECO includes gross wage data for all EMU countries except Malta; for Malta we utilize total compensation to calculate gross wages by assuming that the ratio of wages to compensation is equal to the EMU median. AMECO also includes gross wage projections through 2016.
We augment the AMECO data with minimum wage and unemployment duration data from Eurostat from 1999–2014, and minimum wage data for 2015. The minimum wage is a biannual average of minimum wage statistics published 1 January and 1 July; for 2015 we use the 1 January minimum wage. As noted in footnote 9, Austria, Cyprus, Finland, Germany, and Italy do not have a minimum wage for some or all of the years in our sample. For these countries we construct a shadow minimum wage utilizing the average yearly relationship between average and minimum wages in other EMU countries (approximately 50 percent).
Finally, we use projections for GDP growth, the GDP deflator, the unemployment rate, and total population from the IMF's World Economic Outlook through 2020. While AMECO provides gross wage projections for 2015 and 2016, projections for gross wages from 2017 to 2020 as well as unemployment duration (short-term unemployment) are unavailable. We calculate gross wage projections by assuming that the ratio of gross wages to GDP is constant for 2017–2020, equal to the average of the last years for which there are data. This assumption utilizes that the ratio of gross wages to GDP is fairly constant over time in each eurozone country over the relevant time period, consistent with a common stylized assumption that the wage share is constant, at least over short time periods.
Second, IMF projections include the unemployment rate, but not the duration of unemployment, or the numbers of unemployed or employed workers. To calculate the number of short-term unemployed, we first impute the size of the labor force and the numbers of unemployed and employed workers using population projections, by assuming the labor force is a constant share of population. We then assume a constant share of short-term unemployment in total unemployment to calculate the number of long-term and short-term unemployed. Across the sample, a one-unit increase in the unemployment rate is associated with a 1.5 unit increase in the share of long-term unemployment in total unemployment. Note that this assumption implies the short-term and long-term unemployed are reincorporated into employment at the same rate during recoveries. Because short-term unemployment generally falls more quickly than long-term unemployment during recoveries, this assumption is relatively stringent and biases the projection calculations against fiscal feasibility. Finally, we apply the same methodology to generate projections for various unemployment durations (Figures 5 and 6).