3 Razin et al’s empirical results
Razin et al’s empirical analysis is designed to test which effects dominate in practice. The data come from 12 European countries[2] and the United States, over the period 1965-1992. They carry out an Ordinary Least Squares regression, with country-specific fixed effects. Because data are not available for all countries in all years, the panel is unbalanced. Two different dependent variable are used. The first is the ‘labour tax rate’, which uses ‘revenue statistics to calculate an average tax rate on labor income’ (Razin et al 2002: 912), and was assembled by Razin et al based on a method set out in Mendoza, Razin, and Tesar (1994). The second dependent variable is (the log of) benefits per capita. These are also calculated by Razin et al from OECD data, and include unemployment and disability benefits, though they are dominated by payments to the aged. The independent variable of interest is the ‘dependency ratio’, which Razin et al define as one minus the proportion of the population in the labour force.[3]
Razin et al include a number of control variables, based on previous studies of the size of the welfare state. These variables are shown in Table 1. Trade openness is measured by imports and exports as a percentage of GDP. Income inequality is measured by the share of total income received by the top quintile divided by the share received by the middle quintile. The other variables are self-explanatory. All data come from the OECD analytical database, apart from the data on income shares, which come from the World Bank’s inequality database. Summary statistics for the variables are presented in Razin, Sadka and Swagel (2001a: Table 1).
As can be seen from the estimated coefficients on the dependency ratio in Table 1, Razin et al find that increased dependency rates are associated with reduced taxation and benefits. Within the framework of their model, this suggests that the fiscal leakage and education-reducing effects have outweighed the voting power effect.
| Labour tax rate | (Log of) benefits per capita | |||
|---|---|---|---|---|
| (1) | (2) | (3) | (4) | |
| Dependency rate | -0.382 (-4.02) | -0.383 (-4.40) | -7.493 (-8.81) | -7.492 (-8.80) |
| Government jobs / employment | 0.915 (12.17) | 0.729 (10.01) | 4.467 (6.64) | 4.611 (6.47) |
| Trade openness | 0.198 (8.09) | 0.131 (5.45) | 0.740 (3.73) | 0.792 (3.37) |
| Per capita GDP growth | -0.187 (-2.83) | -0.127 (-2.09) | -2.716 (-4.59) | -2.762 (-4.63) |
| Rich / middle income share | -0.055 (-2.77) | -0.049 (-2.66) | 0.276 (1.55) | 0.271 (1.52) |
| Unemployment rate | 0.480 (7.82) | -0.370 (-0.62) | ||
| Period* | 1965-1992 | 1965-1992 | 1965-1992 | 1965-1992 |
| N | 330 | 330 | 330 | 330 |
| R2 | 0.753 | 0.793 | 0.617 | 0.618 |
Note – All specifications include fixed effects (coefficients not shown.) The value for R2 does not include the contribution of the fixed effects. The numbers in brackets are t-statistics.
Source – Razin et al(2002: Table 1)
Notes
- [2]The 12 countries are Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, the United Kingdom.
- [3]Razin et al’s definition is somewhat different from the usual definition in the literature on population ageing, though perhaps more economically meaningful. The usual definition is the number of people outside the working ages divided by the number in the working ages.
