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Policy Area Papers on Social security

Human Resource Development (HRD) and Foreign Remittances: The case of South Asia
Muhammad Abdul Wahab, Vaqar Ahmed & Hamid Mahmood, World Economics, December 2013
This study tries to document linkages between HRD, migration and remittances in South Asia. We have explained in detail the various channels through which HRD promotes migration and remittances, and a case has been made not to consider this process as brain drain – rather it should be viewed by public policy practitioners as brain circulation which can in turn result not just in increased foreign exchange reserves but also increased prospects for transfer of technology and creative ideas. Econometric results suggest that infant mortality, gross primary school enrolment and real per capita GDP have a negative relationship with remittance inflows in South Asia, whereas gross tertiary school enrolment and access to financial instruments have a positive relationship with remittances in these countries. The result indicates that higher levels of education facilitate mobility of labour and allow better opportunities for working abroad.
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Demystifying Youth Unemployment
Terence Tse, Mark Esposito & Jorgo Chatzimarkakis, World Economics, September 2013
Youth unemployment has become an ever increasing serious socio-economic problem, which deserves far more attention that it has so far received. In this article, we examine the causes of this issue. They include 1) countries losing the ability to compete effectively and therefore cannot create high-quality jobs, 2) inflexible labour markets that prevent young people from being hired, 3) many young labourers prefer not to work (hard), and 4) mismatch of skills and employers’ needs. We urge governments to take decisive and fast actions to combat this problem before it turns itself into a major crisis.
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It’s Time to Retire the US Military’s Retirement System
Chris Springer, World Economics, December 2010
The author outlines a retirement system for the most expensive government organisation in the world – the US military. The plan incorporates positive aspects of both defined benefit and defined contribution plans that cost less and are more valuable to service members than the current system, which was put into place in 1947. The paper uses previous studies that reflect service members’ ‘value’ of retirement pensions and US Department of Defense net present value assumptions to prove his case and demonstrate how the DoD can save tens of billions of US dollars, while increasing the value of the plan in the eyes of those who serve.

This paper builds on previous work done in 2006, when the author wrote a paper titled ‘Is It Time to Update the Army’s Retirement System?’. However, this paper focuses more broadly on the overall military retirement system and takes into account the changes that have occurred since 2006 regarding the general debate on retirement pensions, the macroeconomic conditions that have changed drastically in four years, the political reality of future government budget cuts (such as with the military retirement system), and the fact that anything related to military compensation being a target because US military benefits (primarily health care, pay, and bonuses) have increased steadily over the years since 2001.

Are Governments Overextended?: Assessing the spectrum of a government’s debts and its exposure to risk
Peter S. Heller , World Economics, December 2004
Have government debt levels reached dangerous levels? Certainly, for some countries, the data would suggest so. However, this paper will argue that for many governments, the amount of explicit debt on their balance sheets seriously understates the magnitude of their future fiscal obligations. This clearly emerges from the assessment of many analysts on the size of the prospective fiscal obligations associated with aging populations. But this point is further reinforced if one examines the range of other fiscal risk exposures of governments. Thus, an examination of a government’s explicit debt should only be the starting point for assessing the sustainability of a government’s fiscal position.
Demographics and Pension Reforms in the Major Central and Eastern European Countries
Dieter Bräuninger, World Economics, March 2003
Today in the Central and Eastern European (CEE) countries there are barely 30 pensioners for every 100 persons of working age. By 2050, the number could rise to almost 80 pensioners. So far Poland has responded the most rigorously to the challenge, establishing a modern three-pillar pension system. The new second pillar forms the core of the bulwark against future demographic strain, with private savings being accumulated in personal accounts kept at private pension funds. Hungary has also established a second pillar of private pension funds, but the necessary restructuring of the state pension scheme is not proceeding fast enough. In the Czech Republic, a three-pillar system thus far exists only on paper.
The Growing US Fiscal Gap
Daniel Shaviro, World Economics, December 2002
The United States has a huge long-term fiscal gap, perhaps with a present value as great as $74 trillion. The US may thus be unable to continue meeting its current spending commitments without eventually enacting huge tax increases. The tax cut enacted in 2001 may have increased the fiscal gap by about $13 trillion, but the main cause of the gap is increasing life expectancy, which raises the cost of Social Security and Medicare. While the fiscal gap can in theory be eliminated at the stroke of a pen by simply changing stated policy, in practice this could lead to serious disruption of people’s expectations. In addition, the fiscal gap may impair future generations’ opportunity to take full advantage of technological advances (such as in treating cancer) that have the potential to make their lives significantly better than ours.
What Do We Know About the Shadow Economy?: Evidence from 21 OECD countries
Friedrich Schneider, World Economics, December 2001
Estimates of the size of the shadow economy in 21 OECD countries are presented. The average size of the shadow economy (as a percentage of ‘official’ GDP) over 1999/2000 in these countries is 16.7%. The author concludes that it is the increasing burden of taxation and social security contributions, combined with rising state regulatory activities, that are the driving forces for the recent growth in size of the shadow economy in the countries concerned.
Is Public Spending Good for You?
Yew-Kwang Ng, World Economics, June 2001
Studies by psychologists, sociologists and economists indicate that increases in incomes beyond about US$4,000 are not related to happiness nor significantly with the objective quality-of-life indicators (which increase with scientific and technological breakthroughs at the global level). Yet everyone wants more money. This may be explained by environmental disruption, relative-income effects, inadequate recognition of adaptation effects, and the materialistic bias due to our accumulation instinct and advertising. These factors cause a bias towards private consumption, making public spending, especially on research and environmental protection (with their long-term and global public-good nature) well below optimal. This is made worse by economists’ emphasis on the excess burden of taxation, ignoring the negative excess burden on the spending side.
Understanding Labour Market Institutions
Gilles Saint-Paul, World Economics, June 2000
Labour market rigidities are often considered to be responsible for high unemployment in Europe. This paper outlines a theory explaining why they may be supported by the political system, and where their support comes from. Labour market rigidities are likely to arise as the outcome of microeconomic imperfections which allow incumbent employees to reap rents, and as a device to alleviate redistributive conflicts among groups of workers. Their support depends on the employed’s exposure to unemployment, the degree of underlying inequality in skills, and the responsiveness of employment to labour costs. It is shown that different labour market institutions, such as employment protection, wage rigidities, and unemployment benefits, may mutually reinforce each other, so that we expect to observe them together. Also discussed are implications for the timing and design of reform.
Poles Apart: Labour market performance and the distribution of work across households
Paul Gregg, Kirstine Hansen & Jonathan Wadsworth, World Economics, June 2000
Analysis of labour market performance using individual level data can reach radically different conclusions to those provided by a household-based analysis, using the same source of information. In Britain and other OECD countries the number of households without access to earned income has grown despite rising employment rates. Built around a comparison of the actual jobless rate in households with that which would occur if work were randomly distributed, the authors show that work is becoming increasingly polarised in many countries. Changing household structure can only account for a minority of the rise in workless households, so that labour market failure is the dominant explanation. Polarisation of work will have important welfare and budgetary consequences for any country.
The Thirty-five Hour Working Week: Flexibilité, compétitivité, productivité-a French Revolution
Alan Kirman, World Economics, June 2000
The introduction of a reduced working week (RWW) in France has been widely condemned as an arbitrary additional constraint in an already rigid labour market. This article explores the origins of the law, and the reasons for the negative appreciation by economists of this measure. However, it goes on to suggest that the concessions gained by the employers in terms of flexibility coupled with the state aid involved have resulted in an increase in labour market flexibility in France. This may explain the fact that, contrary to the predictions of many economists, the French economy is now growing faster rather than slower as compared to the period before the introduction of the legislation, and that unemployment is falling.
Welfare-to-work and the New Deal
Richard Layard, World Economics, June 2000
Welfare-to-work is on trial in many countries. In Britain it has become the
government’s most important policy for lowering unemployment and expanding
labour supply. But can it work? And what lessons does Britain’s experience
provide for other countries? This paper argues that whilst the Welfare-to-Work
approach has the power to transform the lives of millions—by making them self-sustaining
rather than dependent—it requires extreme sensitivity. The help must
be of very high quality and the spirit of the policy must be visibly in the clients’
interest. The author concludes that the New Deal has been an extraordinary
success from that angle, with very high levels of client satisfaction. It is a good
example for other countries to follow. But each future step must be as sensitive as
the last.

European Pension Reforms: A study by Merrill Lynch
Jan Mantel & David Bowers, World Economics, March 2000
Are the present pension systems in Europe substainable? Can the pensions time bomb caused by demographic changes be defused? This study describes developments in Europe, but the theory, the problems and the solutions are similar for most developed nations in the rest of the world. The combination of declining labour market participation rates–which magnifies the demographic ageing problem on public finances–and expectations of future ageing of the population will make most public retirement schemes expensive to run and major reforms are necessary. European governments have a number of options to compensate for the negative effects of ageing on pensions. The most effective strategy is to increase the effective and/or official retirement age. But only a combination of measures will be able to take away completely the negative financial effect of ageing on state pension schemes. What is clear from the study is that most measures to be taken to combat the situation will include some form of pain: the pensioner or the present generation of workers or governments’ finances or all of them together will suffer some negative consequences.

Pension Reform in Germany: To fund or not to fund
Axel Börsch-Supan, World Economics, March 2000
German public retirement insurance is in many respects an extreme example of the typical European pay-as-you-go pension system because almost 85% of retirement income stems from this system and only 15% comes from private sources such as funded pensions, labour income, and family transfers. Public retirement insurance has come under severe pressure from population ageing and incentive effects reducing labour supply. This paper argues that pre-funding a significant part of the German system will alleviate both pressures.

The Public/Private Mix in UK Pension Policy
Phil Agulnik & Nicholas Barr, World Economics, March 2000
The UK government aims to shift the balance between public (Pay-As-You-Go) and private (funded) pensions from 60:40 today to 40:60 by 2050 (UK DSS 1998). What is the economic rationale for this shift? Funding pensions may have a positive effect on economic growth and the long-term sustainability of the public finances, but such a move is only one of a menu of policies capable of achieving these outcomes. It follows that some other ratio between public and private provision would be possible, and there are a range of policy directions open to the government.

Achieving the goals of UK Pension Reform
Frank Field, World Economics, March 2000
There is an inevitable tension between the aim of providing enough income in retirement for those genuinely unable to build up a sufficiently large fund of their own and the aim of preserving people’s incentives to save for their own retirement. The author argues that if the current UK government’s proposals for pension reform are implemented, a significant proportion of the working population will have their incentives for retirement saving undermined and this situation will become a further hurdle in the way of successful pensions reform.

Values Matter
Avner Ben-Ner & Louis Putterman, World Economics, March 2000
Human beings display a complex set of behavioural predispositions, including a strong inclination to pursue self-interest but also empathy, receptivity to norms of reciprocity, and an inclination to punish violators of such norms. Not only are workable economic arrangements constrained by the types of people a society shapes from the genetic material at hand, but also, the arrangements adopted will themselves strengthen or weaken dispositions towards reciprocity and other behaviors. Here the case is argued for considering the two-way interaction between institutions and values by discussing three examples: the workplace, the family, and social insurance systems.