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Prof. Bertola on European labour markets, his stay in Freiburg and the success of Italien economists

ZG: Prof. Bertola, you received your PhD at the MIT, you taught in Princeton and the European University Institute in Florence. You have been an associate editor of journals like Economic Policy, Macroeconomic Dynamics, The European Economic Review and The Review of Economic Studies. And you advised the European Commission as well as the European Central Bank. Needless to say that your work is also published in all major journals… What are you doing here in Freiburg?

Bertola: Well, if people want to listen to me and they pay a little for it, I would go anywhere… No, in fact Thomas Gehrig is a close friend. He told me I would not be disappointed by the students here – and it is true. So among the many things I do – and I probably do too many things and not all of them well – I like to talk to students and see if they agree.

ZG: You have been teaching in the US. Is there a big difference between being an economist in the US and being an economist in Europe?

Bertola: Yes, there is still a big difference. Especially because in the US there are different types of economists at different types of schools but there is a clear ranking among them. However, their mindsets are very similar. In Europe, the problem I see is that the definition itself of economics is a little bit different depending on who you talk to. So economics in Europe is more fragmented – that’s the main difference.

ZG: German Professors often complain that they are concerned with too many administrative tasks as well as too much teaching. Is this something that limits European research?

Bertola: Yes, it cannot help research if you have to do a lot of administration and teach many hours. But I do think those are important things. Since we are working for the government, we need to do these things well. So the answer is yes, but at the same time I don’t think it would be right to just release Professors from those things to only do research. Again, the problem in Europe is that there is typically less of a distinction between different jobs. In America there are young assistant professors who are supposed to be publishing in top journals and are relieved from administration and teaching to some extent. In Europe everybody is supposed to do everything and often they cannot do everything well.

ZG: Italy and Germany have similar problems in financing their universities. Germany just introduces tuition fees. In Italy universities are offering fewer courses. Which is the right way to go?

Bertola: In Italy the government is trying to cut the funds and reduce the power of professors and also rationalize the course offerings. What has happened over the last ten years or so is that more power was given to local universities, which is a good thing if there are checks – if there’s competition or some other way to control for quality. But because there was not enough of that, universities hired a lot of new Professors, promoted already hired Professors and started offering a wide variety of courses with doubtful quality. Now, the government is trying to address the situation by reducing the funding and by putting administrative constraints. The problem with this is that it initially worsens things. When you can no longer fund everything, how do you choose what to fund? Usually the universities themselves have the power to decide: Oh we need to keep this nice course in the “economics of creativity” while we can do without “business science”. What is really necessary is more information to students and families about what the courses actually do – less advertising and more substantial information. Once this is in place more freedom of choice should be given to universities. It’s really about creating a customer relationship. The customer could the families or the state but someone must have an eye on the universities. In Italy students usually just go to the closest university choosing their courses more or less randomly.

ZG: Do you think that the mechanism through which students are allocated among universities and programs should be changed?

Bertola: Yes, but that’s a topic that Germany, Italy and many other European countries resist to touch. What actually happens now is that illusions are given to people that anybody can go to university. But then what happens is that either the universities are very bad or a lot of students have to be kicked out after a year or two. So, again, more information should be given to future students. And then, if this information is not enough, we should introduce entry exams or select by other additional criteria – It’s for the students own good.

ZG: I don’t know if you heard, but in the last weeks there has been a debate among German economists about methodology.

Bertola: …Yeah, yeah… I heard. Prof. Fitzenberger and Prof. Gehrig told me…

ZG: 83 mainly older economists signed a petition in a major German newspaper claiming that there would be too much mathematics in today’s economics and that this would lead to a loss of realism. Is this a German problem or…

Bertola: No, it’s more or less the same everywhere. But the debate should not be about tradition and ideology but more on what we economists are actually trying to do. It is clear that for some things we need mathematical economics but it’s also true that economists exists who only know the mathematics and pretend to do economics. In my opinion the question is whether one gets to say something sensible or not. I don’t know the details about this but my sense is that the petition is motivated by ideological reasons. It is more like flags to being flown than about what is actually useful economics – which could be a good question. Now, with the financial crisis some of the more extreme mathematical models give reason to be doubted by empirical terms. So we should be more factual. But when graduate students get a job and they need to know a certain set of things, we should teach those things to them. And with respect to research we need to tell politicians something sensible. Maybe there are non-mathematical ways to do that – fine, show them to me.

ZG: But how would you describe the impact on reality, let’s say of a highly complicated article in “Econometrica”?

Bertola: If it is very complicated but it is motivated by some economic issue, the introduction is already written in a way that links the model to reality. Then, of course, there exists fundamental research. Here you can tell from how much it is cited whether it has a useful bottom line. Maybe you know the “Rubinstein Bargaining Theory”. It’s extremely complicated but the bottom line is: The more patient person gets a larger share… It’s heavily cited but only few people know the details of the proof. I appreciate this kind of work – I couldn’t write it, but I can apply it.

ZG: But is reproducibility not of vital importance for scientific research? I’m especially thinking of numerical simulations. Who could check whether the programs written in some economic departments make sense?

Bertola: I know… There is the issue whether peer review is the right way or not – and there is no better way, so it has to be the right way! Peer review means that an article gets published when somebody who knows that all these things work says it is ok. It is an issue because sometimes – especially in the fields of numerical simulation and heavy theory – there are groups of people who know and like each other that referee one another a lot. But that is unavoidable and has to be kept under control. So peer review is the scientific way of making sure that something is published that can be used without doing all the work again which would defeat the purpose of publishing it.

ZG: One of your research fields are European labor markets. While unemployment in the US remained relatively constant, European unemployment constantly rose over the last 4 decades. What were the driving factors behind this evolution?

Bertola: I just wrote a fairly successful column on the internet about that. It used to be that European unemployment was rising, rising, rising… while in the US it was fluctuating around a low level. But the last ten years in most countries have been different. In most countries you saw structural unemployment beginning to decline because of labor market reforms. Now it is a particularly interesting time because the same flexibilities that have managed to reduce the quantity of unemployment also make unemployment more sensitive to business cycle conditions. So far, not much has happened in Europe except for the case of Spain. Unemployment in Spain went back all the way to the pre-reform level of employment but more for cyclical than for structural reasons. The next six month will be a challenge because the rest of Europe is still holding on because of some remaining rigidities. Firms are also afraid of firing because the crisis could be temporary, so that they would need the workers again in a few months.

ZG: Is it not more the government stepping in and preventing firms from firing than their own wish?

Bertola: Governments are subsidizing short term and temporary labor. So yes, governments and the society don’t want layoffs to happen, but also at the current stage of the crisis it seems like a good idea for firms to wait and see – reduce working time, decrease output… Maybe when the time comes where we need big wage cuts and great restructuring, governments are not willing to subsidize anymore but still don’t want layoffs to happen. This could mean that we go back to rigidities which seem politically appealing in times of crisis. But we saw that this kind of reaction to the previous big crisis in the 70s reduced unemployment as an immediate impact but build a core of unemployment that was very difficult to get rid of.

ZG: It appears to me that in your recent research you always describe the differences in employment levels between the US and Europe as a social choice, a simple tradeoff in a way (most recently: access to financial markets – vs. employment protection)…. Then, why would there be any scope for labor market reforms?

Bertola: Because circumstances have changed! My standard speech when I happen to talk to European Commissioners is: If unemployment would only be a bad thing, it wouldn’t be there. So it has to be the unpleasant side effect of something people want: high stable wage, job security, peace of mind and so on… But reform is a good idea because the price of this good thing in terms of unemployment can be larger or smaller when the world changes: globalization, European Union etc. To say: “we need reform because unemployment is a crazy thing” is unproductive but there are still some liberal politicians who really want to get rid of all labor market regulation. The more constructive process is to look at labor market regulation, taxation and the welfare state and look in which respects we can still afford the old things. On should not start form the position: “all regulation does not make sense” but rather “under some conditions they make sense, are these conditions realized?” Instead, the political debate in many countries is polarized between people who like regulation and those who don’t like it without a middle way. It’s then difficult to do reforms and when it is tried, it usually backfires, worsening the things it was aimed to accomplish.

ZG: Let’s be more specific. How could such a reform look like?

Bertola: Given that regular employees were difficult to get rid of – and this was becoming more of a burden – new categories of employees have been created in many countries. Temporary and part time contracts work like a buffer. Regular employees are still there but the economy adjusts to new circumstances by demanding more or less of this flexible labor. This is what has happened over the last years and could go on until, eventually, regular employees will die out. The issue in many countries is on the table whether this coexistence of highly regulated and completely flexible labor is justified. We should have a hard look on what the world is like now and design a new kind of employment relation that is not completely unregulated but is not as heavily regulated as it was before.

ZG: The supervisor of your PhD thesis Oliver Blanchard …

Bertola: Dornbusch was my supervisior, Blanchard was a big influence, though…

ZG: Ok, we see. Blanchard, however, suggested switching from payroll to layoff taxes to finance unemployment insurance. If he is right, why do we see hardly any country doing it?

Bertola: Well, we do see it in the US. There, unemployment insurance contributions are experience rated which means that if you fire a lot, you have to pay more on your remaining employees. This is in fact the same thing as a firing tax. But what Olivier Blanchard and Jean Tirole have been proposing is not really just replacing the form of contribution. The current form of employment protection in Europe mainly works through the legal system: you have to proof that you really need to fire people and that nothing particularly bad will happen to these people etc… Blanchard and Tirole would like to replace these legal procedures with a mechanical firing tax: If you can pay, you can fire. But this is a very economic thing to do, to put the “right” price on things and it also comes with a very negative view of what happens in courts. I don’t think there’s a magic formula for which is the right firing tax because there are so many things we don’t know – that the government doesn’t know, that the market doesn’t know… If we knew all the relevant parameters of the model we could say: the right firing tax in the Breisgau in June 2009 is 50,750€… We are not in this position, yet. So, it’s a good idea in principal to replace legal procedures with taxes. However, in practice it encounters many difficulties.

ZG: You were also coauthor of the famous Sapir report (“An agenda for a growing Europe”). Continental Europe’s lack of growth is the second major issue economists try to understand and deal with. Are the factors that cause low growth rates the same that cause high unemployment?

Bertola: For a given institutional framework and given market imperfections: yes. The same things that make it difficult to pay high wages without causing unemployment make it difficult to grow: low productivity, low efficiency… But whether we really know what causes growth is not clear. The Sapir report states that we should do more finance and more research and development among other things. These things are right in principal but hard to do in practice. Yet, we economists don’t have a magic way how to create growth.

ZG: Do you see the question of growth always linked to employment or do you perceive growth in the 21st century as a value for its own?

Bertola: I perceive growth itself as an even higher value than employment. Working isn’t generating any utility. The whole notion of labor supply is based on the idea that if you could, you would rather not work. So if we had a way to have low employment and high growth, it would be just fine…

ZG: However, the political debate seems to be always about jobs not growth. Politicians use to say „We need first of all more growth to create jobs!“ It’s not about a second refrigerator, is it?

Bertola: Yes… the first part of the report is actually saying: If we have higher growth, we can afford the same conveniences with less unemployment. The reason for politicians to say we need growth for jobs is that they have in mind people. Jobs are people! Refrigerators are not people! So, having a job is good, especially if you can afford a new refrigerator.

ZG: But is it really the people politicians care about? I recognized that you don’t do a lot of political economy but maybe it is the political process itself that is imperfect and does not generate the growth and employment fostering outcomes.
Bertola: Maybe, yes. But as you said, I don’t do a lot of political economy. If the political process itself is imperfect, I wouldn’t know how to fix it! The politicians we have are the politicians we have…

ZG: Talking about political economy: Why are there so many internationally successful Italian economists?

Bertola: The reason is that the Italian university system was very badly configured when people like me graduated. After the riot in the early 70ies, university access was granted to everyone and almost all academic positions had been filled. So there was no way for young academics to get a job for at least 10 or 15 years, unless you were extremely well connected. Simultaneously, the financial system was highly suppressed. Most banks were state owned and generated huge profits. While they used part of it for political purposes, they also funded young Italians to go abroad and study economics or finance. So, the year I went to MIT there must have been 50 or 60 economists my age attending universities all around the world. By the law of large numbers, some were lucky and got to be interesting economists. This process is still going on to a certain extend. We still don’t have a good internal career system in Italy. So Italy in some sense has been more open than other countries but for bad reasons.

ZG: You came back to Italy rather soon after your time at the MIT and in Princeton…

Bertola: Yes, if I could introduce you to my wife, you would understand… I also wanted my children to grow up in Italy. So it were really family reasons that made me go back to Italy.

ZG: Let’s come to our last topic. Imagine, it is the recent financial and economic crisis. First of all: Be honest, did you see it coming?

Bertola: No! Not at all? No, I mean everybody knew the risk was there but it could have come or it could have not come…

ZG: In the public debate, everybody seems to have an opinion on the crisis and there has been an inflationary high number of articles about it. What is in your opinion an aspect of the crisis that has not been talked about so much and that would deserve more attention?

Bertola: As you say, it’s hard to find something that has not been said. Maybe the one thing that is really at the root of the problem and not discussed as much is that the crisis was caused by market imperfections but also by government imperfections! There are still the people who say markets fix themselves and those people who say markets need to be crushed; but of course both – markets and governments – need to exist. This time it really was the combination of the two that generated problems. So we should focus more on the interface between markets and governments as the real source of the crisis.

ZG: What can we expect from the next months? So far, the European social security systems have prevented the crisis from hitting labor markets too strongly. Will the crisis pass continental Europe without further damage or is the worst still to come?

Bertola: It depends on how long it lasts. There are two different scenarios: One is that China starts growing again, consumption levels in Europe don’t need to fall and everything works out fine. The months of crisis would have been a parenthesis and things maybe don’t go back to the excesses of before but to a similar kind of situation. If this happens, it will be good that the stability of Europe bridged this gap. We’ll get a high dip in production but not in consumption. But if anything else disturbs the macroeconomic environment, a terrorist attack for example, then it could become very ugly. We could get deflation or inflation – nobody knows.

ZG:…and there would be political consequences!

Bertola: It is already clear that the mindset of people has turned against markets. A part of what has happened has been blamed on the common (European) market and reforms towards more flexibility. It could be the Weimar Republic followed by …. World War II, with a small probability!

ZG: So the crisis is extremely dangerous for the European Union?

Bertola: The concept of the European Union is currently in trouble because it is based on some sense of political cohesion. But in time of crisis the European Union does not work like this. Every country is doing its own thing. Again, this is a failure of the interface between governments and markets because in a situation of panic where people are afraid, the government is there to look at things from above to guide and coordinate people. But in Europe and in the World, we don’t have such a government! So every government to some extend reproduces the panic on the international level. However, this scenario is common knowledge so let’s hope that every government knows that this is not the way to behave.

ZG: And a final question: Who is going to win the World Cup in South Africa, again Italy?

Bertola: I like soccer in principal but I cheer for a different team than my wife, so I stopped caring about soccer a long time ago. But in 2006, I was in Frankfurt the night Italy beat Germany. I watched the game heavily disguised with a lot of Spanish friends around me in a beer garden. And when Italy was actually beating Germany I really got some kind of a patriotic rush. However, it’s unusual for me.

ZG: Mr. Bertola, thank you for the interesting talk.

Interview by Max Sties and Johannes Vatter
10 answers of Prof. Bertola:

ZG: The European Union should introduce uniform labor standards!
No, but it should pay attention to which labor standards are enforced by national governments.

ZG: Globalization is a blessing!
Yes, a blessing in disguise.

ZG: Global warming is overrated!
True, I completely agree with this! I’m not an expert but I can’t understand what the big deal with global warming is.

ZG: Germany should further deregulate its labor markets!
As far as I know, Germany still has a long way to go.

ZG: European governments should spend more money on….

ZG: European governments could save a lot of money by….
Reducing industrial subsidies.

ZG: The Bologna Process is a good thing!
There are lots of problems too… but yes.

ZG: Berlusconi is going to stay in office until…
…he dies! – Unfortunately.

10 decisions of Prof. Berola:

ZG: Bernanke or Greenspan?
ZG: Beethoven oder Beatles?
ZG: Keynes or Friedman?
ZG: Car or Train?
ZG: Consume or Save?
ZG: Employment Protection or Minimum Wages?
Employment Protection…. that’s a joke?!
ZG: Employment Protection or Private Finance?
(Hesitating)… Private Finance, if it works.
ZG: Wine or Sports?
Wine – it’s good for your health!
ZG: Thatcher or Merkel?
ZG: Family or Career?
(Hesitating)… First career, then family.
ZG: Treasury Bills or Options?
Options, I have a complicated portfolio.
WTO – I know the ILO and…