Spain's labor market reform

According to WSJ (link), Spain has finally implemented the broader reform of the labor market structure. Spain's 20 percent unemployment rate is the highest in the Euroarea. Traditionally, Spain was known for its notorious and heavily regulated labor market. The country used to maintain high levels of minimum wage and high cost of dismissal. The reform introduced by the Zapatero government removed the restrictions for dismissals on a fair basis and deregulated dismissal procedures on indefinite labor contracts. Dismissal cost has been decreased from 45 days to 33 days of salary per year worked.

The labor reform in Spain led to a lot of controversy among economists. Dani Rodrik (link), for instance, claims that labor market deregulation and fewer firing restrictions will further increase the unemployment rate since the major cause of it is the lack of labor demand. On the other hand, a handful of economists claim that Spain's persistent labor market rigidities are the major cause of country's high unemployment rate.

According to World Bank, redundancy cost in Spain averages 56 weeks of wages, more than twice the OECD level. During recessions, the decline in labor demand usually increases the unemployment rate and, therefore, hiring and firing restrictions do not exert the major influence on firm's decisions to employ additional units of labor. However, the persistence of strong labor market regulation imposes significant economic costs.

First, firms do not employ the optimum amount of labor. High redundancy cost and rigid dismissal procedures lead to either under-employment or over-employment of labor. Thus, firms shift the burden of high labor cost on higher prices, lower dividends and lower net wages.

Second, labor market regulation has broader implications. It eventually leads to more institutional rigidities and more pressure on higher wages by trade unions through collective bargaining. Consequently, wages become downward rigid. During the economic recovery, firms are therefore less motivated to employ new workers or extend the existing labor contracts.

As Spain finally recovered from the recession, the ongoing labor rigidity and even the increasing labor demand could not alleviate Spain's high unemployment rate. It would only put more pressure on Spain's government to increase government spending on unemployment schemes. Therefore, the reform of the labor law based on labor market flexibility is the most plausible alternative for Spain to boost employment and decrease the widening budget deficit that threatens country's economic recovery.

IMF Borrowing Crisis

The graph shows 10 largest borrowing arrangements by International Monetary Fund (IMF). Recent $140 billion rescue package for Greece is one of the largest cradit loan arrangements in the 21st century. The fund's contribution to Greece has surged the overall indebtedness of the Euroarea. During the financial crises IMF usually extended credit lines to the countries in trouble. Recently IMF extended borrowing arrangements to Latvia and Iceland. Before Greek rescue aid, IMF's contribution to Iceland's rescue package was one of the largest borrowing expansions ever given to such a small country. In the future, as emerging economies will further grow, IMF will have to be keen on the possibilities of systemic crises in these countries. The IMF should not extend the rescue loan to every country as this is not always effective in the end. The main purpose of the IMF is to help counties facing balance-of-payments crisis and not being the borrower of the last resort as in the case of Greece.

Source: The Economist

Italian Big Government

The figure from The Economist showes that the number of official cars on the streets in Italy is 6 times as much as in the average European country. The figure doesn't seem to reflect the terrible state of the Italian economy. In 2009, Italy's public debt grew up to 115.3 percent of the GDP. Given the worrying state of public finance, Italy's one of the riskiest countries in the Euroarea. It is a country of an enormous contrast between the developed North and the agrarian South. The country also has one of the largest shadow economies and widespread corruption perceptions in the developed world. Because of reginal income per capita disparity, Italy is a country of significant differences in youth and adult unemployment across the country. According to the OECD, Italy has one of the highest youth unemployment rates in the EU (26.3 percent). In the last year, youth unemployment rate in Italy grew by 5 percentage points. The proportion of youth in employment is 20 percentage points below the OECD average.

Source: The Economist

How farm subsidies kill Europeans

Cardiovascular diseases (CVDs) are the main cause of deaths in the Europe, approximately 49 percent of all deaths, out of which 30 percent of all premature deaths before the age of 65. Cardiovascular diseases are estimated to cost the EU €169 billion every year.

Let take a look at the data. In Germany, 907 men and 237 women on average die prematurely each year before the age of 75 due to coronory heart diseases (CHD). In the UK, 479 men and 1453 women die each year due to premature death alone. The number of premature deaths is high in Mediterranean countries (Italy, Spain) as well. In Italy, 233 men and 826 women die because of the premature death (link).

"The school milk subsidy scheme introduced by the European Commission likewise means that a child drinking full-fat rather than skimmed milk will consume an additional 1.5 kg of saturated fat every year approximately 4 g per day. British children obtain 23% of their daily saturated fat intake from full-fat milk (link)."

To prevent premature deaths in Europe, European policymakers should impose a tax on the products causing significant health problems such as diabetes, obesity, lung cancer, incresing blood pressure, raising cholesterol etc., and by doing so save more lives. The EU Common Agicultural Policy (CAP) annual budget represents approximately €45 billion which represents 45 percent of the overall EU budget. Through subsidies and direct payments, CAP is a source of massive oversupply and overproduction of dairy products. These products are the main source of excessive butter and full-fat milk consumption which further leads to raising cholesterol, coronary heart diseases, incresed blood presure etc. The CAP has a deadly cost - human lives.

Doing Business in OECD

Some of the issues that careful investor would consider when chosing the best country for doing business are the flexibility of the labor market, the nature of the tax system, the cost of starting a business, the protection of investors, contract enforcement, getting credit, etc. To investigate the issue, I collected data on doing business in 27 OECD countries from World Bank's Doing Business.

In the graph you can see the ranking of countries according to the ease of doing business. The best performing OECD country is New Zealand. New Zealand's business environment is known for low corruption perception, strong contract enforcement, low tax rates on labor and capital, not to mention flexible and non-distortionary business legislation. The second best performer is the US followed by Denmark and the UK. In spite of one of the highest fax rates in the world, Danish business environment is a benchmark for the rest of the world in two major policy fields. First, a flexible labor market and second, a robust sistem of legal protection of investors. Among the best performing countries are Anglo-Saxon countries and Nordic countries. These countries are known for relatively free business environment although Nordic countries are characterised by high tax burden and high government spending.

Countries of Continental Europe are ranked in the middle. Their business environment is unfortunately known for high tax burden, high government spending, rigid labor market and, nevertheless, strong governmant intervention. For example, the collective bargaining coverage of labor contracts in Austria and Germany is close to 100 percent which is a measure of strong union power.

The Ease of Doing Business in 27 OECD countries

Source: World Bank

The worst performers in the OECD are Mediterranean and Vishegrad countries (Czech Republic, Slovakia, Poland, Hungary). In addition to high taxes, big government and rigid labor market, Mediterranean countries suffer from a weak rule of law and costly contract enforcement which hinders investor protection and diverts investment from productive into shadow sector of the economy. It is not surprising that in these countries union strikes and shadow economy are widespread.

Days to start business in 27 OECD countries

Source: World Bank

In the upper graph, you can see the number of days necessary to start a business. The findings reflect the pattern of the ease of doing business. Countries with higher administrative burden have the longest procedures in starting a business. Spain and Continental European countries were ranked on top with the highest number of days in starting a business while Anglo-Saxon countries are admired for quick and flexible administrative procedures in starting a business.

Tax and labor cost

I composed a graph from Eurostat's database on tax wedge in EU, US, Iceland, Norway and Switzerland in 2008. Tax wedge is a measure of overall tax burden of labor cost. It shows the share of taxed labor cost. It is striking to see that EU goverments take in almost half of what you earn. Tax wedge is the highest in Belgium (50.3 percent). Hopefully, it does not set an example to the rest of EU countries, as EU15 tax wedge is over 40 percent. After all, EU15 is known for high tax burden. As you can see from the graph, tax wedge is the highest in Continantal Europe. Germany, one of the biggest EU economies, scored second with 47.3 percent, next is Hungary (46.7 percent) followed by France (45.5 percent), Austria (44.4) and other countries. All countries that scored above 35 percent should implement some radical reforms and so became more competitive and attractive for doing business. One of the countries that achieved to reduce tax wedge the most is Cyprus (0.0 percent), second best is Malta with 17.9 percent, Iceland (23.7 percent), Switzerland (26.5 percent), USA (28 percent), Luxemburg (29.6 percent) and UK (29.7 percent).

Source: Eurostat