Friday, May 16, 2014

Generous social safety nets aren't the cause of Europe's problems

From time to time you hear people blaming Europe's economic woes on their generous welfare states. I've always wanted to look more closely at the relationship between the two and have finally gotten around to it. Here I've plotted up European unemployment rates by country versus each country's tax level. Tax data (for 2011) is from here and unemployment data (for Nov 2011) is from here.

It seems that the relationship is the opposite of what we'd expect from listening to the cable news economics of the last couple of decades. Northern Europe continues to demonstrate that countries can successfully combine generous social safety nets with robust economies. The countries struggling the most in Europe, interestingly, are those with the lowest tax rates. See here for more. Remember this figure when US politicians warn that by increasing our social safety net we'll head further down the road toward European-style crisis.

Note: for those interested, the adjusted R^2 here is 0.49 and the R code is below (R is amazing, by the way):

unemployment_by_country <- c(8.3, 9.8, 23, 14.1, 5.6, 9.3, 4.9, 7.2, 7.9, 7.4, 3.3, 18.9, 15, 7.6, 4.3) #as of nov 2011, from the Guardian
names <- c("United Kingdom", "France", "Spain", "Portugal", "", "Italy", "Netherlands", "Belgium","", "", "", "Greece", "Ireland", "", "")
taxes_percent_gdp <- c(36.1, 43.9, 31.4, 33.2, 38.7, 42.5, 38.4, 44.1, 47.7, 44.3, 42.5, 32.4, 28.9, 43.4, 42.0) # in 2011, from eurostat
plot(taxes_percent_gdp, unemployment_by_country, main="European unemployment vs tax rate by country",ylab="Unemployment rate (%)",xlab="Taxes as % of GDP",pch=19)

fit <- lm(unemployment_by_country ~ taxes_percent_gdp)
lm(formula = unemployment_by_country ~ taxes_percent_gdp)

#Adjust labels
text(taxes_percent_gdp,unemployment_by_country,labels=names,cex=0.8, pos=1, col="red")
text(44.3,7.4,"Sweden",adj=c(0,-1),cex=0.8, col="red")
text(43.4,7.6,"Finland",adj=c(1.2,.5),cex=0.8, col="red")
text(42.0,4.3,"Austria",adj=c(0,-1),cex=0.8, col="red")
text(42.5,3.3,"Norway",adj=c(-.2,0),cex=0.8, col="red")
text(38.7,5.6,"Germany",adj=c(-.2,0),cex=0.8, col="red")
text(47.7,7.9,"Denmark",adj=c(.7,1),cex=0.8, col="red")

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