Comments on Anders Forslund: Den svenska jämviktsarbetslösheten – en översikt Bertil Holmlund

1. Comments on Anders Forslund: Den svenska jämviktsarbetslösheten – en översikt Bertil Holmlund Department of Economics Uppsala University

2. Outline • Theory • The Swedish development • Recent Swedish reforms • Unemployment insurance • The income tax system • Other tax reforms • Conclusions

3. Equilibrium unemployment theory

4. Can fiscal policy affect the equilibrium unemployment rate (NAIRU)? • Yes, in an open economy • NAIRU depends in general on the real exchange rate • Fiscal policy can influence the real exchange rate • A fiscal expansion can reduce NAIRU through a real appreciation

5. Equilibrium unemployment in an open economy Real exch. rate AD WS/PS Employment

6. A fiscal expansion in an open economy Real exch. rate AD WS/PS Employment

7. Does the real exchange rate matter for unemployment? • Direct evidence: Lindblad and Sellin (2003) • Indirect evidence: taxes and unemployment • The real exchange rate is part of the total wedge between real consumer and producer wages • A real appreciation is analogous to a tax cut

8. Long run considerations • Balanced trade? • Relevant for the very long run

9. The Swedish development

11. Why did NAIRU double between 1990 and 1994? • Institutional changes? • Major tax reform 1991 (less progressive taxes) • Benefit cuts 1993 • Coordinated wage bargaining 1991 (Rehnbergavtalet) • Hard to identify major changes in institutions that can explain a sharp rise in NAIRU in the early 1990s • But NAIRU probably increased from the 1960s up to the early 1990s

12. Did NAIRU fall over the 1990s? • Benefit cuts took place • Imperfect wage-indexation of benefits • Temporary work agencies (1993) • Product market competition increased • Coordinated bargaining (Industriavtalet 1997) • So NAIRU probably fell over the 1990s

13. Recent reforms • Less generous unemployment insurance • In-work tax credits (Jobbskatteavdrag)

14. Compare benefit cuts and in-work tax credits (S) • Income after tax when unemployed: B • b=B/W is the replacement rate • Income after tax when employed: W+S • Standard model: • Unemployment depends on the replacement rate, b • Model with in-work tax credits, S : • Unemployment depends on (b – s); s=S/W • In-work tax credits and benefit cuts are approximately equivalent

15. Swedish reforms The change in the effective replacement rate has been substantial Should reduce equilibrium unemployment

16. Effects on labor force participation • Benefit cuts should reduce labor force participation • In-work tax credits should increase labor force participation

17. Other tax reforms with implications for employment • Property taxes: • Abolishment of the wealth tax • Cuts in real estate taxes • Effects on labor supply? • Reduced supply on the intensive margin • In-work tax credits have income effects

18. In-work tax credit 2007: average tax rates by income

19. In-work tax credit 2007: marginal tax rates by income

20. Income and substitution effectsH hours of work, W the wage, Y nonlabor income The last term is the marginal propensity to earn out of nonlabor income, mpe

21. Compute the hours response from exogenous tax cuts (income effects) Y is the income increase associated with the tax reduction WH is annual earnings mpe = -0.10 (Imbens et al, AER Sept. 2001)

22. Hours responses to exogenous tax cuts (%)

23. Conclusions • NAIRU in Sweden has increased gradually up to the early 1990s • NAIRU has probably fallen over the 1990s • Benefit cuts and in-work tax credits have probably reduced the NAIRU • In-work tax credits in combination with other tax reforms have reduced work hours