Tag: Europe

What Is the Evidence on the Swedish “Paternity Leave” Policy?

Posted on February 5, 2024 | Policy Brief

20240204 Swedish Paternity Leave image representing fathers parental leave policy

Since 1995, Sweden has earmarked an increasing number of parental leave days to each parent, creating a strong incentive for fathers to increase their (traditionally low) parental leave uptake. The literature on the causal impacts of these policies establishes several important findings. First, the incentive seems to work, as fathers tend to increase their uptake of paternity leave. However, who responds to the incentive, the timing of the leave and how mothers adjust to it is heterogenous, depending on the policy design and the underlying couple characteristics. Second, there is no strong support in the data for the argument, popular in public opinion and among policy-makers, that paternity leave should improve the balance of childcare duties within a couple and ultimately enhance women’s labor market position. However, in order to estimate causal effects, the studies reviewed in this policy brief focus on the first cohort of families affected by earmarked parental policies, whereas impacts on mothers’ labor market outcomes are more likely to manifest in the long run. Further, paternity leave policies in the broader sense have benefitted mothers’ health post childbirth and they may also have broken the social stigma on fathers taking time off to care for their children. Finally, recent evidence suggests that earmarking has improved gender attitudes in the next generation, making men less likely to hold stereotypical views about gender roles in society.

Parental Leave in Sweden

All parents in Sweden have been entitled to paid parental leave benefits since 1974, with no difference between birthing and non-birthing parents (for simplicity referred to as mothers and fathers henceforth). Despite this, fathers’ parental leave take-up has historically been very low (see Figure 1).

To change this pattern, the legislator has introduced a few reforms over the years. In 1995, 30 of the wage-replaced days (i.e. parental leave days compensated at almost the rate of the daily wage) were earmarked to each parent, creating the so called ”mum/dad month”. When a parent failed to take up these 30 days these would be “lost”, as earmarked days could not be transferred to the other parent. Through two subsequent reforms, effective from 2002 and 2016 respectively, the number of earmarked wage-replaced days increased, first to sixty days and then to ninety days.

Today, the total allowance is 480 benefit days, of which 390 are wage-replaced (paid at about 80 percent of the parent’s wage), and the remaining 90 are compensated at a low flat rate (approximately 15 euros per day). 90 of the wage-replaced days are earmarked to each parent. The parental leave days can be utilized until the day the child turns 12 or until the child finishes 5th grade, but 80 percent of these days must be used by the time the child turns 4.

As shown in Figure 1, father’s share of the total parental leave steadily grew over the years when the earmarking reforms occurred but has since 2018 stalled at a rate of 69/31 (i.e., mothers and fathers take 69 and 31 percent respectively of the total number of leave days claimed in Sweden during one year).

Figure 1. Men’s share of parental leave days in Sweden, 1974-2021, in percent.

Source: Author’s compilation based on data from Statistics Sweden.

One could speculate, based on these trends, that earmarking might have successfully increased father’s take-up of parental leave. However, without rigorous statistical analysis, it is virtually impossible to distinguish between the role of the earmarking polices and secular trends in preferences over parental leave. Thankfully, a few papers have studied the Swedish parental leave reforms, using state-of-the art techniques to understand their respective causal impacts. What is the research-based evidence on the Swedish parental leave earmarking reforms? Did they successfully incentivize fathers to increase their take-up? Did they succeed in their broader goal of balancing child responsibilities within couples, ultimately helping women improve their position in the labor-market? How were children affected by them? What lessons from the Swedish experience can be useful for fine-tuning of the Swedish policy or for similar designs in other countries?

This policy brief delves into the academic literature on the impacts of the Swedish earmarking reforms. The review is by no means representative of the large amount of academic work produced on the Swedish parental leave reforms. Rather, it is a small selection of studies where results can be more easily interpreted as causal impacts, as they are based on comparing families with children born just before versus just after the relevant date for the policy implementation, and account for so called month-of-birth effects (see e.g. Larsen et al., 2017) when needed. Causal estimates can be more directly used to inform policy-making, which is what motivates the focus of this review.

Earmarking and Take-up of Paternity Leave

As explained above, the Swedish earmarking system creates strong incentives for fathers to increase their take-up of leave days, as these would otherwise be “lost”, leaving couples with the need to resort to potentially more costly arrangements for childcare.

It is thus not surprising that the 1995 reform increased fathers’ take-up of wage-replaced leave by an average of 15 days, 50 percent of the pre-reform take-up (Ekberg et al., 2013). This change seems to mostly stem from the 54 percent of fathers who were taking 0 days of leave before the reform and were induced to take between 20 and 40 days after, so that the percentage of fathers not taking any leave declined to 18 precent.

In a recent working paper, Avdic et al. (2023) complement this evidence, considering all leave days together. They show that the reform induced fathers to increase their take-up of total parental leave by 21 days, whereby mothers decreased it by the same amount. Therefore, on average, the total amount of leave taken by Swedish parents remained unchanged, but the mother’s share decreased by about 5.4 percentage points. The paper also compares changes in parents’ take-up month-by-month, finding that some mothers took some unpaid leave within the child’s first year to compensate for the loss of wage-replaced days. It is not clear why these mothers would not resort to the low flat rate leave, as other mothers seem to have done (see Ekberg at al., 2013). In general, the data points to fathers having mostly, although not exclusively, substituted for mothers’ time with the child during the child’s second year of life.

Avdic and Karimi (2018) extend the policy-evaluation to the 2002 reform, which earmarked one additional month to each parent, but also made one more month of wage-replaced leave available. They find that this reform also caused an increase in take-up of paternity leave, but for a different group of fathers. While in 1995 fathers that otherwise would have taken no leave were induced to take approximately one month, the 2002 shift occurred mostly among fathers who, instead of taking between 30 and 40 days of leave, started taking more than 50 days.

These findings are consistent with those in Alden et al. (2023), who study the characteristics of fathers who do not take any leave. They find that while the 1995 reform changed the composition of this group of fathers, the same thing did not happen with the 2002 and 2016 reforms. Over-time, one group of men consistently stands out for not taking any parental leave regardless of the incentives created by the legislator, namely fathers with worse labor-market positions, and whose earnings are lower than that of the mothers.

Paternity Leave and Gender Gaps

The main motivation for policies that seek to increase the take-up of parental leave among fathers is that this increase can help women, especially high-skilled ones, improve their labor-market position (Ekberg et al., 2013). The economics literature has long established a systematic loss in earnings and employment for women following the birth of their first child (the so-called child penalty; see e.g. Kleven et al., 2019). There are two main mechanisms through which earmarking policies could improve women’s labor market outcomes. First, if firms discriminate against women because of the (perceived) cost of maternity leave, the discrimination should decline once employers expect also men to take parental leave. Ginja et al. (2020) show evidence (although not causal) consistent with long maternity leaves reducing child-bearing aged women’s “attractiveness” among Swedish employers.  Second, by creating a stronger bond between fathers and children, and by reducing mothers’ specialization in childcare, paternity leave should increase the time fathers allocate to childcare as the child grows up, thus re-balancing the division of non-market (and possibly market) work within the couple.

As pointed out in Cools et al. (2015), the first type of effect, more likely to be relevant in the long run, is hard to estimate with data from only one country, as virtually all employers in the country should be somewhat affected by the change in perceptions.

Instead, Ekberg et al. (2013) study the effect on intra-household division of childcare responsibilities, by estimating the impact of the 1995 reform on the amount of time that fathers and mothers claim off work when their child is sick. They find no evidence that the 1995 reform increased the share of time off taken by fathers to care for sick children. Consistently, the study also fails to find evidence of large and robust changes in mothers’ earnings for thirteen years post childbirth. Similarly, Avdic et al. (2023) show that mothers affected by the 1995 reform did not increase, on average, their labor supply, except during the first year of the child’s life.

While these analyses are extremely valuable for our understanding of the reforms’ effects on the first cohort of families affected, they fall short of capturing long-term dynamics. For instance, it is important to acknowledge that the decision on who takes time off when the child is sick depends on many factors, including the availability of flexible arrangements at work. Women are known for selecting into occupations and jobs that allow a more flexible schedule (Goldin, 2014). This pattern might change if the increase in take-up of paternity leave leads to updated expectations among women on partners’ willingness to share daycare responsibility. This is most likely a long-term development, which the design used in the above outlined studies does not capture.

Another effect of the Swedish parental leave system, not directly linked to earmarking but nevertheless indicative of the importance of fathers’ time off work during the child’s first year of life, is that on mothers’ health. Persson and Rossin-Slater (2019) show that a Swedish 2012 reform that in practice allowed fathers to take 30 days of parental leave in concomitance with the mother during the child’s first year of life reduced the likelihood of mothers experiencing health issues due to post-partum complications.

An important aspect that the literature has so far not emphasized is also that earmarking reforms might affect another gender gap, namely the “freedom” to take the leave. Given the traditional division of roles across genders, there might be a stigma at a societal level against men taking parental leave. By creating strong economic incentives for taking paternity leave, the earmarking policies may downplay the stigma in the short-term and break it in the long-term. There is some suggestive, although not definitive, evidence that norms around paternity leave might have changed. Avdic and Karimi (2018) show that between 1995 and 2002 the share of fathers who were taking more than one month of leave had already started increasing before the second month was earmarked. More research would be needed, however, to assess the role of policies in changing societal perceptions around paternity leave.

Paternity Leave and Children’s Outcomes

An obvious question to ask is how children are affected by earmarking of parental leave days. Avdic et al. (2023) study this question in the context of the 1995 reform. By looking separately at different groups of children by sex and parents’ education, they find that the 1995 reform caused a decline in GPA for sons of non-college-educated fathers and mothers. The most likely channel for this relationship, according to the authors, is boys’ diminished access to fathers’ time, due to the 1995 reform increasing the likelihood of couple dissolution within the child’s first three years of life (for households with low-earning mothers). At that time children tended to live predominantly with the mother in case of parental separation. However, a potential additional channel could be the worsened economic situation caused by the paternity leave. In households with low-earning mothers, mothers’ and family earnings declined post-reform due to mothers compensating for “lost” leave days by taking unpaid leave. Very conflictual separations could also be behind the effect on children’s GPA.

These findings highlight the importance of considering potential unintended consequences of the parental leave policies, and the diverse effects they might have on different demographic groups. Such considerations could improve the design of future policies. For instance, Avdic and Karimi (2018) find that the 2002 reform, which earmarked one more month and added one month of wage-replaced parental leave, did not cause couple dissolution. Thus, the authors conclude that not imposing strong constraints on households, while creating incentives for fathers to take paternity leave, is highly desirable.

Finally, in a very recent working paper, Fontenay and Gonzalez (2024) consider the effect of earmarking policies on children’s gender attitudes as adults, leveraging data from online surveys of 3,000 respondents across six European countries, including Sweden. They study changes in attitudes as measured by an Implict Association Test, which is meant to capture subconscious associations between women and family and men and career.  In five of the countries studied they find that male respondents born soon after an earmarking reform have less stereotypical gender attitudes than those born before. No differences are detected for women. The effect in Sweden is one of the largest: in a sample of 237 male respondents, the father being eligible for the “dad-month” makes the child hold more egalitarian gender-attitudes as an adult by 0.3 standard deviations. The authors suggest that a role model effect might be at play, whereby boys who observe their fathers being more involved in childcare are nurtured to hold more egalitarian beliefs about gender roles.

Conclusion

Since 1995, Sweden has earmarked an increasing number of parental leave days to each parent, creating strong incentives for fathers to increase their previously very low parental leave uptake. This policy brief has reviewed the literature that studies the causal impacts of these earmarking reforms, highlighting a number of important conclusions as well as gaps in the knowledge on the effects of these policies.

First, the incentives created by the earmarking policies seem to work, as fathers tend to increase their uptake of paternity leave, while mothers tend to increase their labor supply during their child’s first year of life. However, such effects are heterogeneous, depending on the policy design and the underlying couple characteristics. Designs that impose strong constraints on household choices seem to have adverse effects on low-income or low-education households, reducing mothers’ earnings, triggering couple dissolution, and negatively affecting children’s GPA. Future increases in earmarking or similar policies in other countries should consider these design details carefully.

Second, there is no strong support in the data for the argument, popular in the public opinion and among policy makers, that paternity leave improves the balance of childcare duties within a couple and that it ultimately enhances women’s labor market position. However, to estimate causal effects, the studies analyzed in this policy brief focus on the first cohort of families affected by the earmarked reforms, whereas impacts on mothers’ labor market outcomes are more likely to be seen in the long run. After all, Sweden is one of the countries with the lowest documented child penalty in employment and earnings (see the child penalty atlas), and it is unlikely that policy played no role in narrowing gender gaps among parents. Consistently, recent evidence suggests that earmarking has improved gender attitudes in the next generation, making men less likely to hold stereotypical views about gender roles in society.

Further, it is important to mention that paternity leave policies in general have benefitted mothers’ post-childbirth health and that they may have broken a societal stigma around fathers taking time off to care for their children.

References

  • Aldén, L., Boschini, A. and Tallås Ahlzen, M. (2023). Fathers but not Caregivers. http://dx.doi.org/10.2139/ssrn.4405212
  • Avdic, D. and Karimi, A., (2018). Modern family? Paternity leave and marital stability. American Economic Journal: Applied Economics, 10(4), pp. 283-307.
  • Avdic, D., Karimi, A., Sundberg, E. and Sjögren, A. (2023). Paternity leave and child outcomes. IFAU, Working Paper 25.
  • Ekberg, J., Eriksson, R., and Friebel, G. (2013). Parental leave—A policy evaluation of the Swedish “Daddy-Month” reform. Journal of Public Economics, 97, pp. 131-143.
  • Ginja, R., Karimi, A. and Pengpeng Xiao. (2023). Employer responses to family leave programs. American Economic Journal: Applied Economics, 15(1), pp. 107-135.
  • Goldin, C., (2014). A grand gender convergence: Its last chapter. American Economic Review, 104(4), pp. 1091-1119.
  • Gonzalez, L. and Fontenay, S. (2024). Can Public Policies Break the Gender Mold? Evidence from Paternity Leave Reforms in Six Countries. BSE, Working Paper 1422.
  • Kleven, H., Landais, C., Posch, J., Steinhauer, A. and Zweimüller, J. (2019). Child penalties across countries: Evidence and explanation”. AEA Papers and Proceedings, 109, pp. 122-126.
  • Larsen, E. R. and Solli, I. F. (2017). Born to run behind? Persisting birth month effects on earnings. Labour Economics, 46, pp. 200-210.
  • Persson, P., and Rossin-Slater, M. (2019). When dad can stay home: fathers’ workplace flexibility and maternal health. National Bureau of Economic Research, Working Paper 25902.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Georgian Economy and One Year of Russia’s War in Ukraine: Trends and Risks

Posted on March 13, 2023 | News

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Russia’s invasion of Ukraine profoundly impacted the global economy, immediately sending shockwaves across the globe. The attack of a country that was once a major energy supplier to Europe on the country which was one of the top food exporters in the world, sent food and fuel prices spiralling, causing major energy shortages and the prospect of protracted recession in the United States and the European Union.

The unprovoked and brutal aggression resulted in nearly universal condemnation and widespread sanctions placed on Russia by the United States, the EU, and other Western allies. Financial sanctions were perhaps the most unexpected and significant with the potential for immediate impact on Russia’s neighbours, including those that did not formally join the sanctions regime. In addition to sanctions, the major consequence of the war was mass migration waves, particularly from Ukraine, but also from Russia and Belarus to neighbouring countries.

At the start of the war, it was expected that the Georgian economy would be severely and negatively impacted for the following reasons:

  • First, as a former Soviet republic, Georgia historically maintained close economic trade ties with both Russia and Ukraine. The ties with Russia have weakened considerably in the wake of the 2008 Russo-Georgian war but remained significant. Russia was the primary market for imports of staple foods into Georgia, such as wheat flour, maize, buckwheat, edible oils, etc. Russia and Ukraine were both important export markets for Georgia. Russia was absorbing about 60 percent of Georgian wine exports and 47 percent of mineral water exports, while Ukraine was one of the leading importers of alcohol and spirits from Georgia (46 percent of Georgia’s exports). Tourism and remittances are other areas where Georgia is significantly tied to Russia and somewhat weaker to Ukraine. Before the pandemic, in 2019 Russia accounted for 24 percent of all tourism revenues, while Ukraine for 6 percent. Remittances from Russia accounted for 16.5 percent of total incoming transfers in 2021.
  • Second, while the Georgian government chose to largely keep a neutral stance on the war (announcing at one point that they would not join or impose sanctions against Russia), the main financial and trade international sanctions were still in effect in Georgia due to international obligations and close business ties with the West. These factors were reinforced by strong support for Ukraine among the Georgian population, where the memory of the Russian invasion of Georgia in 2008 remains uppermost.
  • In addition, Georgia is a net energy importer, and while the dependence on energy imports from Russia is not significant, the rising prices would have affected Georgia profoundly.

Original publication: This policy paper was originally published in the ISET Policy Institute Policy Briefs section by Yaroslava Babych, Lead Economist of ISET Policy Institute. To read the full policy paper, please visit the website of ISET-PI. 

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Homeownership and Material Security in Later Life

Posted on November, 2022 | Policy Brief

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Many previous studies show that homeownership is related to various aspects of well-being, although the causal nature of this relationship is difficult to identify. We analyze the association between homeownership and material security, measured through subjective expectations of being better or worse off in the future, using data from 15 European countries. Our findings show that homeowners have a higher level of material security than renters, with larger differences among those living in big cities. We find that material security increases with the value of owner’s property and at the same time find no significant relationship with education, income or financial situation. We interpret the results as support for one of the most commonly emphasized mechanisms behind the positive effects of homeownership for well-being – that homeownership provides a particular form of material security in old age.

Introduction

Vast empirical literature links homeownership to numerous outcomes, such as well-being, health or mobility (Costa-Font, 2008; Dietz and Haurin, 2003; Rohe and Stewart, 1996 among others). In most cases the specific causal link with homeownership per se is however difficult to demonstrate. This because homeownership, especially in old age, usually reflects the financial resources accumulated over the life course through labor market history, as well as health and family developments (Angelini et al., 2013). This means that many unobservable characteristics can obscure the relationship between homeownership and welfare outcomes and bias the estimated parameters.

Material security is an important aspect of well-being, facilitating longer-term planning of financial decisions, smoothing of expenditures across periods of lower contemporaneous incomes and allowing exceptional spending when faced with various negative shocks. It seems particularly relevant in old age when people’s ability to adjust their current income to their specific needs is significantly reduced, and material needs increasingly depend on health.  As people age and as their ability to maintain labor market activity diminishes, the material resources available to them, and the security these can provide, are increasingly composed of pensions and accumulated assets. Among the latter, fixed assets, and in particular ownership of one’s home, play a very special role, as they provide some financial backup and secure a flow of regular consumption in the form of accommodation.

It is reasonable to expect that homeownership would influence well-being through the channel of material security, particularly in old age. Surprisingly, the findings in the literature directly exploring this mechanism are so far scarce. We address this gap using data collected in the Survey of Health, Ageing and Retirement in Europe (SHARE) on individuals aged 50 years and above. We take advantage of the 2006 edition of the survey from 14 European countries and Israel and develop a measure of perceived future material security using two consecutive questions on ‘the chances that five years from now the standard of living [of the participant] will be better/worse than today’. Participants reported the estimated chances on a scale from 0 to 100, where 0 means ‘absolutely no chance’ and 100 denotes ‘absolutely certain’. In line with previous behavioral literature, we calculate a difference between the chances of being better vs. worse off, and recode into a categorical variable with 5 outcomes spanning from ‘very likely worse off’, through ‘rather likely worse off’, ‘equally likely’, ‘rather likely better off’ and ‘very likely better off’ (more details in Garten et al., 2022). In our sample, ‘equally likely’ is the most frequent category (30 percent of total responses), and being either ‘very’ or ‘rather likely worse off’ was more frequently reported than being better off (48 percent of total responses coded as either outcome for being worse off as compared to 22 percent for the two categories of being better off).

The Impact of Homeownership on Expectations of Future Standard of Living

We regress the measure of perceived material security on an extended vector of characteristics including basic demographics, education, marital status, labor market status, the relative position in the distributions of income and financial assets, and physical and mental health. Our main variable of interest is a categorical measure of homeownership, where individuals are split between renters and homeowners, who are further divided based on the country-specific quartiles of their home value. This measure is then interacted with being a big city resident. Below we present some selected results, which are reported in full in Garten et al. (2022).

In Figure 1 we report the results for each outcome of perception of material security for owner occupiers (depending on the value of their home) as compared to renters, by place of residence. The correlation with material security is particularly strong among those living in cities. However, among other respondents, those in the top quartile of the home value distribution are also more likely to report being optimistic about their material conditions in the future. For big city dwellers, the differences between renters and home owners are statistically significant already for owners with home values in the second quartile of the distribution, and the effects carry through to higher quartiles. The differences for selected perceptions of material security are not only statistically significant but also large in magnitude in the case of city dwellers who own the most expensive properties. As compared to renters they are 3.7 percentage points more likely to expect that their future situation will be either ‘rather’ or ‘very likely’ better. Among those living in big cities, 17.5 percent and 8.5 percent respectively, declare these positive expectations. This means that proportionally, the estimated 3.7 percentage points correspond to respective increases of 21.2 percent and 43.3 percent. 

Figure 1. Marginal effects of homeownership for outcomes of perception of material security

Note: Results presented as marginal effects based on estimations using the ordered probit model with 95% confidence intervals. More details available in Garten et al. (2022).

We relate the marginal effect of owning a property in the top quartile of the home value distribution, as compared to owners with properties in the bottom quartile or renters, to the effect resulting from: higher education, being in the top income quartile or in the top financial assets quartile. While education, income and financial assets affect the perception of future material situation in the expected direction, the estimated relationships are statistically insignificant, and their magnitude is much lower compared to the estimated relationship with homeownership.

Conclusion

Relative to renters, individuals owning their homes tend to have higher levels of well-being across numerous dimensions (see Garten et al., 2022 for an overview). Due to the complex nature of the accumulation of wealth and its interaction with different spheres of life over the life cycle, the identification of the causal character of this relationship is a nearly impossible task. Although many mechanisms behind this relationship have been suggested, few have actually been put to the test against real-life data. Therefore, better understanding of these mechanisms might be a way to verify the hypothesis that homeownership actually matters for well-being.

Our findings confirm that homeowners – in particular those living in big cities – enjoy a higher level of self-perceived material security and are more likely to express optimism about their material standard of living in the future as compared to renters. Such feeling of security for the coming years may contribute to a more general positive outlook, and consequently to the higher reported levels of well-being and life-satisfaction observed in the literature. The examined relationship is especially strong among those in the top quartile of the distribution of property values, although for dwellers in big cities the effect is also strong for those with lower property value. While these findings cannot be interpreted as strictly causal, we suggest that owning a home offers a very particular type of material security in old age and that this security might be an important mechanism leading to the observed positive relationship between homeownership and overall well-being.

Acknowledgement

The authors wish to acknowledge the support of the German Science Foundation (DFG, project no: BR 38.6816-1) and the Polish National Science Centre (NCN, project no: 2018/31/G/HS4/01511) in the joint international Beethoven Classic 3 funding scheme – project AGE-WELL. For the full list of acknowledgements see Garten et al. (2022).

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Rewarding Whistleblowers to Fight Corruption?

Posted on October 23, 2017 | Policy Brief

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Whistleblower reward programs, or “bounty regimes”, provide financial incentives to witnesses that report information on infringements, helping law enforcement agencies to detect/convict culprits. These programs have been successfully used in the US against procurement fraud and tax evasion for quite some time, and were extended to fight financial fraud after the recent crisis. In Europe there is currently a debate on their possible introduction, but authorities appear much less enthusiastic than their US counterparts. In this brief, we discuss recent research on two commonly voiced concerns on whistleblower rewards – the risk of increasing false accusations, and that of crowding out other motivations to blow the whistle – and the adaptations these programs may need to fight more general forms of corruption. Research suggests that the mentioned concerns can be handled by an appropriate design and management of the programs, as apparently done in the US, and that these programs can indeed be a cost effective instrument to fight corruption, but only in countries with a sufficient quality of the judicial system and administrative capacity. They may instead be problematic for weak institutions environments.

Corruption and fraud seem to remain highly widespread in almost all countries. For example, a recent survey of over 6,000 organizations across 115 countries shows that one in three organizations, both worldwide and in the US, experienced fraud in the past 24 months, prevalently in the form of asset misappropriation, cybercrime, corruption, and procurement and accounting fraud (Global Crime Survey, 2016).

Whistleblower (protection and) reward programs are a possibly effective tool to combat fraud and corruption, at least in the light of the US successful experience, where for a long time whistleblowers reporting large federal fraud have been entitled to up to 30% of recovered funds and sanctions under the False Claims Act. The US Internal Revenue Service (IRS) also allows whistleblower rewards in the tax area, and the Dodd-Frank Act introduced them for financial and securities fraud, apparently also with success (c.f. Call et al., 2017, and Wilde, 2017).

In Europe and the rest of the world, instead, rewards are absent and whistleblowers are still poorly protected from retaliation from employers. Some countries have taken encouraging legal steps to at least improve protection, and a discussion is ongoing at the G20 level on how to further improve the situation (G20 report, 2011).

Although many praise whistleblowers, there has been a large range of objections raised against introducing rewards (and even against improving whistleblower protection); mostly by corporate lawyers and lobbyists, but also by regulatory and law enforcement agencies (see Nyreröd and Spagnolo, 2017, for an overview).

In the rest of this brief, we focus on two often voiced concerns, the risks of eliciting false/fraudulent reporting and of crowding out of non-financial motivation, on which recent research has shed light that should be taken into account in the current policy debate. We then discuss some problems linked to the use of whistleblower rewards programs in a more general corruption context.

Fraudulent reports

One concern commonly raised in the discussion of whistleblower rewards is that they may create incentives to fraudulently report false or fabricated information in the hope of receiving a reward. Although clearly an important concern to take into account, we only know of very few anecdotal cases of malicious or false reporting, and fraudulent reporting does not appear to have been a major problem in the US (see again Nyreröd and Spagnolo, 2017 for an overview of the empirical evidence).

A recent paper by Buccirossi, Immordino and Spagnolo (2017) analyzes this concern within a formal economic model and shows that it is not a ground (or an excuse) for not introducing appropriately designed and managed protection and reward programs in countries with sufficiently effective court systems. In these countries, stronger sanctions against lying to the court can (and should) be introduced to balance the incentives for manipulation that may be generated by large bounties. Most legal systems already have defamation and perjury laws, which means that a whistleblower is already committing a crime by fraudulently reporting false information, that can easily be strengthened where necessary without giving up whistleblower rewards. According to this study, the balancing of incentives is what allows the US to effectively use large financial incentives for whistleblowers, besides a very strong protection from retaliation, with little problems in terms of fraudulent reports.

However, the study also shows that this is only possible if the precision (effectiveness, independence) of the court system is sufficiently high. Where court systems are imprecise, the interaction between courts’ mistakes in the legal case based on the information reported by the whistleblower and in the following case for perjury/defamation against the whistleblower if the first case is dismissed, incentives for fraudulent reports, and courts’ adaptation of the standard of proof to account for these incentives, make it impossible to appropriately balance the two incentives. Therefore, whistleblower reward programs should not be introduced in environments where the law enforcement system is ineffective, independently from why it is so (bureaucratic slack, incompetence, political interference, corruption, etc.).

Crowding-out non-financial motivation

Another concern is that whistleblower rewards may have a “crowding out” effect on intrinsic motivation. The problem is that “the commodification of whistleblowing via the provision of bounties may render would-be whistleblowers less likely to come forward by reducing the moral valance of the wrongdoing” (Engstrom, 2016:11). Recent experimental evidence suggests that this concern is overstated. In particular, Schmolke and Utikal (2016) investigate the effects of whistleblower rewards in an environment where one subject may increase his payoff at the cost of harming the group, and find rewards to be highly effective in increasing the number of crimes reported. Data from that experiment suggests a little role for crowding out of non-monetary motivation, if any. Another recent study by Butler, Serra and Spagnolo (2017) investigates if and how monetary incentives, expectations of social approval or disapproval, and the salience of the harm caused by the reported illegal activity interact and affect the decision to blow the whistle. Experimental results show that financial rewards significantly increase the likelihood of whistleblowing and do not substantially crowd out non-monetary motivations activated by expectations of social judgment. The study also finds that public scrutiny and social judgment decrease (increase) whistleblowing when the public is less (more) aware (aware) of the negative externalities generated by the reported crime. All in all, most the recent studies we are aware of suggest that crowding-out of non- financial concerns is not a first-order problem for whistleblower reward schemes as long as there is a clear perception of the public harm linked to the illegal behavior reported by the whistleblower.

Whistleblower rewards and corruption

Although whistleblowing can occur in any sector, firm, or government, an area of particular interest is corruption. Corruption in public procurement is estimated to cost the EU 5.3 billion Euros annually. Hence, corruption deterrence through increased whistleblowing could save the EU significant resources annually (EC Report, 2017).

Contrary to fraud, corruption always takes at least two parties, a bribe taker, typically a government official or politician, and a bribe giver, which may be a firm or an individual. The fact that at least one additional party is involved than in the standard case of fraud, should make whistleblower rewards programs even more powerful since they may deter corruption by increasing the fear that a (potential or real) partner in crime may blow the whistle, even when no third party witness observes the illegal act (Spagnolo, 2004).

When the reported wrongdoer is an individual, as is often the case with corruption, there may be an issue in the use of rewards for whistleblowers linked to the funding of the rewards (c.f Nyreröd & Spagnolo, 2017b for an overview).

In the current US schemes, rewards for whistleblowers are ‘self-financing’, as they constitute a fraction of the funds recovered thanks to the whistleblower or/and of the fines paid by the culprits. An individual and a government official involved in a corrupt deal may, however, not be wealthy enough for the fines and the recovered funds to amount to a sufficiently strong incentive to blow the whistle, given the loss of future gains from the corrupt relationships and the various forms of retaliation whistleblowing may lead to. This problem is of course also relevant for fraud when an individual with few or well-hidden assets is the culprit, rather than a corporation, but it seems particularly relevant for corruption.

Whistleblower reward programs are also malleable to the concerns at hand. If the priority is to combat higher-level corruption, then setting a monetary threshold for when a claim is to be considered is appropriate to limit administrative costs for the program. Indeed, a concern with utilizing whistleblower rewards programs for combating lower-level corruption is that the administrative burden required looking through the whistleblower claims and the costs of limiting abuses may outweigh the benefits gained in detection and deterrence. This concern is also valid for small fraud and tax evasion, which is why all the US programs have a minimum size for cases eligible to whistleblower rewards, but the problem is likely to be more relevant to the case of ‘petty’ corruption. These programs are more suited for ‘large cases’ in which the amount of funds recovered is large enough to pay for rewards and administrative costs, making these programs self-financing even without calculating the benefits for the deterrence/prevention of future infringements. However, when focusing on large corruption cases, other issues become relevant.

An issue particularly important for the case of ‘grand’ corruption is how independent the judicial system is from political pressure, and how able it is to protect whistleblowers against politically mandated retaliation. If corrupt politicians can importantly influence courts, the police or other relevant administrative agencies, then protection can hardly be guaranteed and inducing witnesses to blow the whistle through financial incentives may put their life at risk, although sufficiently large rewards can partly compensate for this risk and help escaping part of the retaliation.

Conclusion

On the whole, whistleblower rewards, in general and in the corruption context specifically, remain a promising tool to detect and deter crime. Careful design and implementation are necessary, because as for any powerful tool, these programs can be well used to do great thing, but also misused to do great damage. As the US experience has shown, along with sufficiently independent and precise courts and an effective administration of law enforcement, well designed and administered whistleblower reward programs hold the promise of greatly improving fraud and corruption detection and of being self-financing through recovered funds and fines.

Of course, even in a very good institutional environment, a poor design and/or implementation can lead to poor performance and do more harm than good (c.f. the case of leniency policies in China discussed in Perrotta et al., 2017). Moreover, in poor institutional environments, where the court system is not sufficiently precise and independent and other law enforcement institutions are not effective, even well-designed and implemented whistleblower reward schemes may bring more problems than benefits. Whistleblower rewards, as any other high-powered incentives, need good governance to ensure that the potentially very high benefits they can generate will be realized. Third parties like international courts and organizations could potentially provide for some low institution environments, the independent safe harbor necessary to protect whistleblowers and a check on court effectiveness for the award of financial incentives.

References

  • Global Economic Crime Survey, 2016. Available at: https://www.pwc.com/gx/en/economic-crime-survey/pdf/GlobalEconomicCrimeSurvey2016.pdf
  • Buccirossi, P., Immordino, G., and Spagnolo, G., 2017. “Whistleblower Rewards, False Reports, and Corporate Fraud”. SITE Working Paper No. 42, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2993776
  • European Commission Report, 2017. Estimating the Economic Benefits of Whistleblower Protection in Public Procurement, Milieu Ltd.
  • Engstrom, D., 2016. “Bounty Regimes”, in Research Handbook on Corporate Criminal Enforcement and Financial Misleading (Jennifer Arlen ed., Edward Elgar Press, forthcoming 2016)
  • Butler, J., Serra, D., and Spagnolo G., 2017. “Motivating Whistleblowers.” Unpublished manuscript.   Available at: https://www.aeaweb.org/conference/2017/preliminary/1658
  • Schmolke, K.U., Utikal, V., 2016. “Whistleblowing: Incentives and Situational Determinants.” FAU – Discussion Papers in Economics, No. 09/2016. 2016. Available at: https://ssrn.com/abstract=2820475
  • Call, A.C., Martin, G.S, Sharp, N.Y., Wilde, J.H., 2017. “Whistleblowers and Outcomes of Financial Misrepresentation Enforcement Actions.” Journal of Accounting Research, forthcoming.
  • Wilde, J.H., (2017). “The Deterrent Effect of Employee Whistleblowing on Firms’ Financial Misreporting and Tax Aggressiveness”, The Accounting Review, forthcoming.
  • Nyreröd, T. Spagnolo, G., 2017a “Myths and evidence on whistleblower rewards”, SITE Working Paper No.
  • Spagnolo, G., 2004. “Divide et Impera: Optimal Leniency Programs.” CEPR Discussion Papers 4840, 2004.
  • Nyreröd, T. Spagnolo, G. 2017b. “Whistleblower Rewards in the Fight against Corruption?” (in Portuguese), forthcoming in the book  Corrupção e seus múltiplos enfoques jurídi
  • Berlin-Perrotta, M., Qin, B. and Spagnolo, G., 2017. “Leniency, Asymmetric Punishment and Corruption: Evidence from China,” SITE Working Paper. Available at:https://ssrn.com/abstract=2718181 or http://dx.doi.org/10.2139/ssrn.2718181
  • G20 Anti-Corruption Action Plan, Protection OF Whistleblowers Study on Whistleblower Protection Frameworks, Compendium of Best Practices and Guiding Principles for Legislation, 2011. Available at: https://www.oecd.org/g20/topics/anti-corruption/48972967.pdf
  • Wolfe S., Worth M., Dreyfus S., Brown A.J., 2015. Breaking the Silence, Strengths and Weaknesses in G20 Whistleblower Protection Laws, 2015. Available at: https://blueprintforfreespeech.net/wp-content/uploads/2015/10/Breaking-the-Silence-Strengths-and-Weaknesses-in-G20-Whistleblower-Protection-Laws1.pdf

Examining Social Exclusion among the 50+ in Europe – Evidence from the Fifth Wave of the SHARE Survey

Posted on November 2, 2015 | Policy Brief

Though intuitive, the concept of social exclusion is complex and hard to measure. Recently, however, we have witnessed policymakers and international institutions increasingly pay attention to better understand material and social distress and to identify the means to improve a broadly defined standard of living. In this brief, we summarize some of the results and conclusions from a recently published First Results Book based on the latest data from the Survey of Health, Ageing and Retirement in Europe (SHARE). We discuss the approach adopted to measure material and social deprivation, and the subsequent identification of risk of social exclusion. We show that Europeans increasingly value the quality of their social life as they grow older and that factors, such as worsening health, unmet long-term care needs, loneliness or lack of social cohesion are important determinants of social exclusion among the 50+ population. If socio-economic policies are to respond effectively to the needs of older Europeans, then broader aspects of their lives need to be taken into account and public policy should go beyond simple targets of income-defined poverty.

The Survey of Health Ageing and Retirement in Europe (SHARE) is an international research project focused on the European 50+ population, and combines information on key areas of life including health, labour market activity, financial situation, social involvement as well as family and social networks. The fifth wave of this panel study took place in 2013 with detailed interviews conducted in 15 European countries. The survey included a special set of questions aiming to improve the understanding of the degree of financial difficulties faced by the 50+, and to address the question of the extent of social exclusion in different European countries. The First Results Book documenting details of the survey has just been published by the international research team involved in the SHARE project. In this brief, we discuss some key results reported in this publication with focus on the analysis of deprivation and social exclusion in Europe among the 50+.

Capturing a Complex Concept of Social Exclusion in Socio-Economic Data

In recent years, the notion of “social exclusion” has been gaining importance as a reference in academic and policy circles with regards to the goals and conduct of socio-economic policy. In fact, in the Europe 2020 strategy, the European Union has made a formal commitment to “recognise the fundamental rights of people experiencing poverty and social exclusion, enabling them to live in dignity and take an active part in society” (European Commission, 2010). Yet, while the concept has an intuitive appeal, the approach to its measurement and analysis has been far from formalised and continues to leave room for a high degree of arbitrariness. This flexibility in the treatment of social exclusion, given the nature of the concept, may seem necessary and in fact desired, but at the same time requires a lot of care at the level of analysis and caution with regard to conclusions drawn from it.

The recent increase in the popularity of broad measures of financial circumstances, going beyond the simple income-based poverty indicators, reflects a number of limitations of the latter as far as it reflects overall material conditions and welfare of individuals. These limitations may be particularly important in the case of older individuals, for whom material wellbeing will be strongly affected by health status or disability, as well as by the extent of accumulated assets at their disposal (e.g. Laferrère and Van den Bosch, 2015; Bonfatti et al., 2015). With this in mind, the fifth wave of the SHARE survey was enriched with a set of additional questions aimed at identifying different sources of deprivation that 50+ individuals are especially exposed to. Based on available data we developed two SHARE-specific measures to assess material and social aspects of deprivation, which were further combined into a single indicator of social exclusion. 13 items from the SHARE questionnaire, exploring affordability of basic needs and financial difficulties among SHARE respondents, were brought together into an aggregate indicator of material conditions (Bertoni et al. 2015). The measure of social deprivation was derived from 15 SHARE items investigating social isolation, quality of neighbourhood and social involvement (Myck et al. 2015). In both cases, so-called hedonic weights were applied to individual items (weights based on the relationship of deprivation items with life satisfaction measure). Based on the threshold of the 75th percentile of total distribution of each of the two indices, individuals with high levels of deprivation in both dimensions were classified as at risk of social exclusion. The scientific value of developed measures has been validated by Najsztub et al. (2015), who found a good compliance in the cross-country variation of material and social deprivation and with common welfare indicators, such as the Human Development Index or income per capita.

Ageing and Social Exclusion among Older Europeans

Comparing material and social deprivation between those aged 50-64 years old and respondents aged 65+ shows that while the level of social deprivation is higher for the older group, the opposite is true for material deprivation (Myck et al. 2015). This suggests that social deprivation grows with age; on the one hand because of increased isolation of older people, and on the other, because older individuals may value their social circumstances more. This conclusion is supported in Shiovitz-Ezra (2015), who reports that, with regards to loneliness, social cohesion and neighbourhood quality play an increasingly important role among older respondents.

Figure 1 Proportion of Individuals at Risk of Social Exclusion by Country

fig1Source: Myck et al. (2015)

When analysing country variation of the two-dimensional indicator of being at risk of social exclusion, we can see that the proportion of the 50+ population exposed to this risk is the highest in Estonia (27.1%), Israel (25.5%) and Italy (23.1%; see Figure 1). On the other hand, countries with the lowest proportion of individuals at risk of social exclusion are Denmark, Sweden and Switzerland. In these countries the proportion is lower than 4%. Naturally, there is important variation in the risk of exclusion also within countries. For example, the results of Hunkler et al. (2015) show that compared to a native born, migrants suffer much higher degree of exclusion in their present country, which, to a lesser extent, is also true for their children.

An analysis of factors that affect the risk of social exclusion reveals that higher education, being employed or retired, and living with a partner substantially limit this probability (Myck et al., 2015). There is also a strong correlation between social exclusion and poor health status. Older people in poor health and those with limited ability to carry out activities of daily living are more vulnerable to both material and social deprivation (Laferrère and Van den Bosch, 2015). People requiring long-term care but reporting unmet needs in this domain are more likely to suffer from deprivation in the social dimension. Importantly from a policy point of view, Bertoni et al. (2015) provide evidence that eyesight and hearing loss contribute to a higher probability of social exclusion, and among the oldest old lead to reduced actual social participation.

Conclusion

Since the importance of different aspects of social life increases when people grow older, policy instruments targeted at income-defined poverty will be ineffective in addressing important aspects of older people’s welfare. It therefore seems important that broader aspects of everyday life are taken into account when constructing socio-economic policies aimed at reducing social exclusion among older Europeans.

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References

  • Adena, M., Myck, M., Oczkowska, M. (2015) Material deprivation items in SHARE Wave 5 data: a contribution to a better understanding of differences in material conditions in later life. In: Börsch-Supan et al. (2015).
  • Bertoni, M., Cavapozzi, D., Celidoni, M., Trevisan, E. (2015) Development and validation of a material deprivation index. In: Börsch-Supan et al. (2015).
  • Bertoni, M., Celidoni, M., Weber, G., Kneip, T. (2015) Does hearing impairment lead to social exclusion?. In: Börsch-Supan et al. (2015).
  • Bonfatti, A., Celidoni, M., Weber, G., Börsch-Supan, A. (2015) Coping with risks during the Great Recession. In: Börsch-Supan et al. (2015).
  • Börsch-Supan, A., Kneip, T., Litwin, H., Myck, M., Weber, G. (eds) (2015) Ageing in Europe – Supporting Policies for an Inclusive Society. De Gruyter.
  • European Commission (2010) EUROPE 2020: A European strategy for smart, sustainable and inclusive growth.
  • Hunkler, C., Kneip, T., Sand, G., Schuth, M. (2015) Growing old abroad: social and material deprivation among first- and secondgeneration migrants in Europe. In: Börsch-Supan et al. (2015).
  • Laferrère, A., Van den Bosch, K. (2015) Unmet need for long-term care and social exclusion. In: Börsch-Supan et al. (2015).
  • Myck, M., Najsztub, M., Oczkowska, M., (2015) Measuring social deprivation and social exclusion. In: Börsch-Supan et al. (2015).
  • Najsztub, M., Bonfatti, A., Duda, D. (2015) Material and social deprivation in the macroeconomic context. In: Börsch-Supan et al. (2015).
  • Shiovitz-Ezra, S. (2015) Loneliness in Europe: do perceived neighbourhood characteristics matter? In: Börsch-Supan et al. (2015).