(AIEL Series in Labour Economics) Giuliana Parodi, Dario Sciulli (Auth.), Giuliana Parodi, Dario Sciulli (Eds.) - Social Exclusi

AIEL Series in Labour Economics
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Giuliana Parodi Dario Sciulli
•
Editors
Social Exclusion
Short and Long Term Causes
and Consequences
Prof. Giuliana Parodi Asst. Prof. Dario Sciulli
Dipartimento di Metodi Quantitativi Dipartimento di Metodi Quantitativi
e Teoria Economica e Teoria Economica
Università ‘‘G. d’Annunzio’’ Università ‘‘G. d’Annunzio’’
di Chieti-Pescara di Chieti-Pescara
Viale Pindaro 42 Viale Pindaro 42
65127 Pescara 65127 Pescara
Italy Italy
parodi@unich.it d.sciulli@unich.it
ISSN 1863-916X
ISBN 978-3-7908-2771-2 e-ISBN 978-3-7908-2772-9
DOI 10.1007/978-3-7908-2772-9
Springer Heidelberg Dordrecht London New York
Library of Congress Control Number: 2011936144
Ó Springer-Verlag Berlin Heidelberg 2012

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Acknowledgments
This book contains a collection of papers, most of which have been presented at
the thematic session on ‘‘Social Exclusion’’ of the XXV Annual Conference of the
Italian Association of Labour Economists (AIEL), held at the University
‘‘G. d’Annunzio’’ of Chieti-Pescara in September 2010.
All the papers, before being published, have been submitted to a double blind
peer-review process. This has been possible thanks to the contributions of the
referees: all the papers have benefited from their valuable suggestions.
We are also indebted with various institutions that have provided us the
financial support that has made possible this publication. We would like to thank:
the Italian Association of Labour Economists, the Camera di Commercio, Indu-
stria, Artigianato e Agricoltura di Chieti, the Camera di Commercio, Industria,
Artigianato e Agricoltura di Pescara, the Dipartimento di Metodi Quantitativi
e Teoria Economica of the Università ‘‘G. d’Annunzio’’ di Chieti-Pescara, the
Facoltà di Scienze Manageriali of the Università ‘‘G. d’Annunzio’’ di Chieti-
Pescara and the Università ‘‘G. d’Annunzio’’ di Chieti-Pescara.
Referees
Luca Beltrametti, Università di Genova, Italy
Roger A. Bowles, University of York, UK
Floro Ernesto Caroleo, Università Parthenope di Napoli, Italy
Sergio Destefanis, Università di Salerno, Italy
Donata Favaro, Università di Padova, Italy
Renata Livraghi, Università di Parma, Italy
Emanuele Millemaci, Università di Messina, Italy
Catia Nicodemo, Universitat Autonoma de Barcelona, Spain
Carmen Pagliari, Università G. d’Annunzio di Chieti-Pescara, Italy
Giuliana Parodi, Università G. d’Annunzio di Chieti-Pescara, Italy
Matteo Picchio, Universiteit van Tilburg, The Netherlands
Cristina Salvioni, Università G. d’Annunzio di Chieti-Pescara, Italy
Dario Sciulli, Università G. d’Annunzio di Chieti-Pescara, Italy
v
vi Acknowledgments
Antonello Scorcu, Università di Bologna, Italy

Marcello Signorelli, Università di Perugia, Italy
Peter J. Sloane, University of Swansea and IZA Bonn, UK
Massimo Tamperi, Università Politecnica delle Marche, Italy
Francesco Timpano, Università Cattolica del Sacro Cuore - Sede di Piacenza -,
Italy
Ainura Uzagalieva, Universidade dos Açores, Portugal
Robert J. Waldmann, Università di Roma Tor Vergata, Italy
Contents
1 Introduction and Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Giuliana Parodi and Dario Sciulli
Part I The Structural and Long Term Causes of Social Exclusion
2 Health, Lifestyle and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Gianluigi Coppola
3 A Comparative Analysis of Literacy Rate in Contributing

to Social Exclusion Insights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Edgardo Bucciarelli, Carmen Pagliari, Fabrizio Muratore
and Iacopo Odoardi
4 Education and Socioeconomic Mobility in

Post-Communist Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Alina Veraschagina
5 Analysing Industrial Accidents in European Countries

Using Data Envelopment Analysis . . . . . . . . . . . . . . . . . . . . . . . . 93
Eugenia Nissi and Agnese Rapposelli
Part II Groups Structurally Vulnerable to Social Exclusion
6 Social Exclusion and Offending . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Roger Bowles
7 Disability and Social Exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Peter J. Sloane and Melanie K. Jones
vii
viii Contents
8 Civilian Disability Pensions as an Antipoverty Policy Instrument?

A Spatial Analysis of Italian Provinces, 2003–2005 . . . . . . . . . . . 149
Massimiliano Agovino and Giuliana Parodi
Part III Economic Crisis, Labour Markets and Social Exclusion
9 Measuring the Long Wave. Unemployment, Discouragement

and Semi-Employment in Italy, During and After the Crisis . . . . 171
Leonello Tronti and Riccardo Gatto
10 Poverty and Unemployment: The Cases of Italy and Spain . . . . . 199

Tindara Addabbo, Rosa García-Fernández, Carmen Llorca-Rodríguez
and Anna Maccagnan
11 Labour Market Transitions During the Financial

Crisis in Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
Marco Lilla and Stefano Staffolani
12 Labour-Market Dynamics and Unemployment: New Scenarios

in the Italian Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
Carlo Lucarelli and Chiara Mussida
Contributors
Tindara Addabbo Dipartimento di Economia, Università di Modena e Reggio-

Emilia, Modena, Italy, e-mail: tindara.addabbo@unimore.it
Massimiliano Agovino Dipartimento di Metodi Quantitativi e Teoria Economica,
Università ‘‘G. d’Annunzio’’ di Chieti-Pescara, Viale Pindaro 42, 65127 Pescara,
Italy, e-mail: agovino.massimo@gmail.com
Roger Bowles York Criminal Justice Economics York, UK, e-mail: roger.
bowles@btopenworld.com
Edgardo Bucciarelli Dipartimento di Metodi Quantitativi e Teoria Economica,
Italy, e-mail: e.bucciarelli@unich.it
Gianluigi Coppola Dipartimento di Scienze Economiche e Statistiche, Università
di Salerno Salerno, Italy, e-mail: glcoppola@unisa.it
Rosa García-Fernández Métodos Cuantitativos para la Economía y Empresa,
Universidad de Granada Granada, Spain, e-mail: rosamgf@ugr.es
Riccardo Gatto ISTAT Rome, Italy, e-mail: rigatto@istat.it
Melanie K. Jones School of Business and Economics, Swansea University
Swansea, UK, e-mail: M.K.Jones@swansea.ac.uk
Marco Lilla Dipartimento di Economia, Università Politecnica delle Marche,
Ancona, Italy, e-mail: m.lilla@univpm.it
Carmen Llorca-Rodríguez Departamento de Economía Internacional y de
España, Universidad de Granada, Granada, Spain, e-mail: cmllorca@ugr.es
Carlo Lucarelli Ufficio Formazione e Lavoro, ISTAT, Rome, Italy, e-mail:
calucare@istat.it
Anna Maccagnan Dipartimento di Economia, Università di Modena e Reggio-
Emilia, Modena, Italy, e-mail: anna.maccagnan@unimore.it
ix
x Contributors
Fabrizio Muratore Scuola Superiore, Università ‘‘G. D’Annunzio’’ di Chieti-

Pescara, Pescara, Italy, e-mail: fabrizio.muratore@gmail.com
Chiara Mussida Dipartimento di Scienze Economiche e Sociali, Università
Cattolica del Sacro Cuore, Sede di Piacenza, Italy, e-mail: chiara.mussida@
unicatt.it
Eugenia Nissi Dipartimento di Metodi Quantitativi e Teoria Economica,
Italy, e-mail: nissi@dmqte.unich.it
Iacopo Odoardi Scuola Superiore, Università ‘‘G. D’Annunzio’’ di Chieti-
Pescara, Pescara, Italy, e-mail: iacopo.odoardi@alice.it
Carmen Pagliari Dipartimento di Metodi Quantitativi e Teoria Economica,
Italy, e-mail: c.pagliari@unich.it
Giuliana Parodi Dipartimento di Metodi Quantitativi e Teoria Economica,
Italy, e-mail: parodi@unich.it
Agnese Rapposelli Dipartimento di Metodi Quantitativi e Teoria Economica,
Italy, e-mail: a.rapposelli@unich.it
Dario Sciulli Dipartimento di Metodi Quantitativi e Teoria Economica, Università
‘‘G. d’Annunzio’’ di Chieti-Pescara, Viale Pindaro 42, 65127 Pescara, Italy,
e-mail: d.sciulli@unich.it
Peter J. Sloane School of Business and Economics, Swansea University, Swansea,
UK, e-mail: p.j.sloane@swan.ac.uk
Stefano Staffolani Dipartimento di Economia, Università Politecnica delle
Marche, Ancona, Italy, e-mail: s.staffolani@univpm.it
Leonello Tronti Università di Roma Tre, Rome, Italy, e-mail: l.tronti@funzione-
pubblica.it
Alina Veraschagina Dipartimento di Economia e Diritto, Università di Roma La
Sapienza, Rome, Italy, e-mail: alinaver@gmail.com
Chapter 1
Introduction and Overview
Giuliana Parodi and Dario Sciulli
1.1 The XXV AIEL Conference
The XXV Conference of AIEL (Associazione Italiana degli Economisti del Lavoro)
was held in the Università d’Annunzio in Chieti-Pescara in September 2010. The
theme chosen for the thematic session was ‘‘Social Exclusion’’, in line with the
choice made by the European Union to make 2010 the ‘‘European year to fight
poverty and social exclusion’’. The European Commission defines social exclusion
for societies and for individuals: ‘‘for societies: disintegration and fragmentation of
social relations and hence of social cohesion… for individuals… a progressive
process of marginalization leading to economic deprivation and various forms of
social and cultural disadvantage’’. From another perspective, the socially excluded
can include individuals who are unable to participate in the basic economic and social
activities of the society in which they live. In the Conference, the themes under
investigation have ranged from causes to consequences of social exclusion, focusing
on disability, gender gaps, youth, income distribution, discrimination, accidents at
work, and literacy rates (LR). Selected works that were presented at the Conference
have been invited to be part of this book, to which distinguished authors, not present
at the Conference, have also been invited to contribute.
The book is organised in three parts: the first and the second parts deal with
structural, long-term causes of social exclusion (i.e., health, education, disability,
G. Parodi (&) D. Sciulli

Dipartimento di Metodi Quantitativi e Teoria Economica,
Università d’Annunzio di Chieti-Pescara,
Pescara, Italy
e-mail: parodi@unich.it
D. Sciulli
e-mail: d.sciulli@unich.it
G. Parodi and D. Sciulli (eds.), Social Exclusion, AIEL Series in Labour Economics, 1
DOI: 10.1007/978-3-7908-2772-9_1, Springer-Verlag Berlin Heidelberg 2012
2 G. Parodi and D. Sciulli
crime); the third part deals with short-term causes of social exclusion and, in
particular, the effects of the most recent economic crisis. In most of the papers,
social exclusion is assessed in terms of unemployment, income, and education.
The first part deals with the long-term, structural causes of social exclusion and,
in particular, the problems associated with its possible effects on health (Coppola),
education (Bucciarelli, Pagliari, Muratore, Odoardi, and also Verashchagina), and
work conditions (Nissi and Rapposelli). The second part deals with vulnerable
groups who are particularly at risk of social exclusion [i.e., former convicted
persons (Bowles) and disabled persons (Sloane and Jones, Agovino and Parodi)].
Finally, the third part discusses problems connected with the mechanisms of the
labour market, one of the main direct or indirect causes of social exclusion, with
special emphasis on the effects of the most recent economic crisis on social
exclusion, including unemployment (Tronti and Gatto), poverty (Addabbo, García-
Fernández, Llorca-Rodríguez and Maccagnan), and transitions within the labour
market (Lilla and Staffolani and also Lucarelli and Mussida).
In what follows, we briefly discuss the approaches used to investigate social
exclusion; we also revise the main effects of the most recent economic crisis on the
labour market and policy measures put (or not put) into effect to overcome its
effects. We then present a brief summary of the contributions that appear in the
three parts of the book. Finally, we draw some conclusions.
1.2 Main Approaches to the Discussion of Social Exclusion
Social exclusion is a term that has jumped to the forefront of the literature since it
was first used in France in the 1970s. Since then, it has been widely adopted as a topic
of economic policy, both by governments and by researchers; for example, in 1997,
the British government set up a Social Exclusion Unit (SEU), and the London School
of Economics set up the Research Centre for the analysis on Social Exclusion
(CASE); in 2007, the Social Inclusion Unit was set up in Australia; within the
European Union, the definition of social exclusion has been sharpened over time
(Nolan and Whelan 2010).
Social exclusion is interpreted both as a static situation of deprivation and as a
process leading to it. Multidimensional poverty and social exclusion are closely
related concepts, but they do not overlap. Both of these concepts refer to Sen’s
intuition of capability failures, but in the multidimensional approach to poverty,
failure is viewed in terms of shortfalls from a threshold for each function, and in the
social exclusion approach, failure is interpreted as an inability to participate and,
therefore, identifies functioning failures. These two different approaches refer to
quantitative and qualitative aspects, respectively, of social exclusion (Chakravarty
and Zoli 2009).
Initially, the threshold was defined in terms of income. Social exclusion came
very close to the definition of poverty; subsequently, it was defined in terms of
observed and unobserved heterogeneity. At the individual level, shortfalls in the
1 Introduction and Overview 3
exclusion or deprivation score of a person depend on the number of characteristics

from which that individual is excluded. With respect to heterogeneity, the litera-
ture differs both with respect to the variables considered relevant hindrances to
take part in societal life, and with respect to the weights to be attributed to them.
There is a consensus on some of the variables to be included in the definition, such
as housing, health and education. Other authors include financial difficulties, basic
necessities, durables, social contacts, and dissatisfaction. Authors’ choices vary in
terms of whether the effect among these variables is multiplicative or additive.
If multiplicative, being excluded in just one dimension is sufficient to create social
exclusion. Moreover, some dimensions may be considered more relevant than
others, so the same or different weights can be attributed to shortcomings in each
characteristic. Gender effects of social exclusion have been investigated, even
though only few significant differences have been found between genders.
Furthermore, few significant differences have been found between cohorts with
respect to social exclusion; therefore, the findings about the factors affecting social
exclusion appear to be robust.
With respect to time, social exclusion shows a dynamic or longitudinal
dimension: duration of the time spent in deprivation is considered important in
defining social exclusion, even though the literature differs in deciding how long
permanence in deprivation must be in order to allow for a definition of social
exclusion, or to lead to social exclusion. True state dependence, and therefore
persistence, has been investigated with respect to social exclusion. In fact, sto-
chastically socially excluded people appear to experience a shorter duration in
social exclusion compared with the structurally socially excluded (Adato et al.
2004). The inter-generational legacy of social exclusion has also been investigated,
overall and with respect to specific variables. Research has found that traditional
elements of transmission of disadvantage, such as class, play a minor role when
compared with other more specific variables. Moreover, there are indications that
some legacies of disadvantage perpetuate themselves across generations in a
segmented way, i.e., bad housing perpetuates itself, as do low educational
achievements, demographics and family behaviours, personality behaviours and
mental health (Nolan and Whelan 2010).
Society’s social exclusion can be interpreted as the aggregate of individuals’
social exclusion. Some axiomatic measures of social exclusion have been proposed
(Chakravarty and Zoli 2009), where societies’ overall social exclusion has been
derived from the individuals’ social exclusion. A country’s social exclusion is
determined by the weighted social exclusion of the various groups of excluded
people within it. In policy terms, the elimination of exclusion in one group would
reduce social exclusion in the country for Europe, see for instance Chackravarty
and D’Ambrosio (2003).
The policy implications of these findings do not always follow a single trend:
short-term intervention(s) are needed if persistence appears as the main factor
explaining social exclusion, while long-term intervention(s) are needed to deal
with structural factors that affect social exclusion. In the European Commission
Report on Social Exclusion (2010), an account is given of EU structural
interventions and the financial intervention of individual member states. The

European Union has tackled the problem of social exclusion with various initia-
tives. In 2006, the Social Policy Agenda, 2006–2010, was established and renewed
by the Social Agenda presented in 2008. The structural European Funds provide
direct financial intervention, and in particular, the European Social Fund for the
2007–2013 period allocates € 756 billion to the Member States. Furthermore, the
EU launched specific programs for categories of people particularly at risk of
social exclusion, such as the 2007–2013 PROGRESS (Programme for Employ-
ment and Social Solidarity), which is financed with € 743 million; programmes for
youths; the HELIOS programme for disabled people; programmes for the elderly;
and programmes for gender equality. In addition, the European Union takes an
active role in raising awareness towards the problems of social exclusion and
poverty with diversified initiatives: it ran an investigation on people’s attitudes
towards social exclusion (e.g., 2007, Eurobarometer) and nominated 2010 as the
year to fight poverty and social exclusion, which entailed financing several
important initiatives in the Members States. At the level of individual countries,
the 2010 European Commission Report provides information on various policies
that address poverty and social exclusion, in connection with the labour market,
education, health, housing, and social networks. The labour market is the only area
where Member States have agreed on a common benchmark for 2010: to
encourage at least 25% of the long-term unemployed into training, re-training,
work practice, employment or another employability measure, combined,
where appropriate, with on-going job search assistance. In all other areas, Member
States pursue their own independent policies. In 2006, the EU27 on average
devoted 27% of their respective GNP to social protection; these transfers cover
both prevention policies (such as pensions and health) and alleviation policies
(such as unemployment benefits and housing). As an indicator of the structural
effect of these policies, we can look at the reduction in the at risk of poverty rate
after social transfers (excluding pensions), which is 27% for the entire EU 27, with
a particular strong effect on children under 18, for whom the reduction in the risk
of poverty rate rises to 39%. This aggregate figure conceals great heterogeneity
among countries; for instance, the risk reduction after social transfer is particularly
low in Mediterranean countries, such as Italy, Greece, and Spain.
1.3 Economic Crisis, Labour Markets and Social Exclusion
Economic conditions are an important factor in determining poverty and social

exclusion. During economic downturns, people are exposed to higher unemploy-
ment and, possibly, to fiscal austerity applied by governments in order to control
deficit and public debt levels. Moreover, without adequate policies, economic
downturns are likely to produce unbalanced outcomes that affect disadvantaged
people and that lead to higher inequality, poverty and social exclusion.
Leschke and Watt (2010), focusing on the role of the 2008–2009 economic
crisis on incomes, public budget and labour markets, have highlighted the impli-
cations of economic crisis regarding social effects. According to the
European Commission statistics (2010), more than 80 million Europeans,
including 20 million children, live at risk of poverty and social exclusion. The
economic crisis has made things worse by putting an estimated 5 million more
people out of work, potentially exposing many more families to poverty and social
exclusion.
European labour markets were strongly affected by the 2008–2009 economic
crisis; it caused a severe output decline that was quickly transmitted to the labour
market, producing a reduction in employment and working hours and, in many
countries, a strong increase of unemployment rates and underemployment. These
effects represent a challenge for labour markets and for the social policies of
European governments to mitigate the welfare loss of their citizens. Many
European countries entered the recession with low unemployment rates, partly
because of the effects of structural labour market reforms implemented since the
1980s. In any case, unemployment has increased strongly in the European Union
during the 2008–2009 economic downturn, reaching 9.6% in March 2010
(EUROSTAT 2010). However, the rise in unemployment has been quite hetero-
geneous across European countries. According to the OECD (2010) analysis, job
losses were particularly high in countries (e.g., Spain, Ireland, USA) where the
housing market contributed the most to the economic downturn. On the contrary,
unemployment has only slightly increased in countries where the economic crisis
was mainly explained by a decline in exports (e.g., Germany, the Netherlands,
Slovak Republic, and Japan). Moreover, job losses have been distributed hetero-
geneously among worker groups and industries. The economic crisis has more
strongly affected construction, mining and manufacturing sectors; young,
low-skilled and temporary workers have been the most affected at the individual
level by the economic downturn. Statistics indicate that youth unemployment is
two to three times greater than the average unemployment rate, and this effect
is especially prevalent among low-qualified workers, for which exit from the
labour market and/or the loss of earnings should be carefully avoided. Similar
considerations apply to immigrants.
Heterogeneous effects at worker level also reflect the structure of the economy
and labour market institutions. For example, Bentolila et al. (2010) have found that
Spain would have avoided 40% of new unemployment if it had adopted French
employment protection legislation. It follows that, while flexibility policies have
strongly contributed to increase employment in Europe until the economic
recession, flexible labour markets during economic crises are associated with
higher unemployment rates, especially for specific worker groups (e.g., youth
unemployment).
The 2008–2009 recessions has also affected the unemployment dynamics of
many European countries; it has caused an increase in unemployment inflows and
a reduction in unemployment outflows, contributing to an increase in the unem-
ployment pool and in the average duration of unemployment. In this case as well,
unemployment dynamics have affected various countries and various worker

groups differently.
European governments have adopted various measures with the aim of reducing
the social impact of the economic downturn. In this sense, even though the economic
recovery had begun in 2009, many European countries have continued to expand or
hold constant resources to finance unemployment benefits and re-employment
assistance. Unemployment benefit systems should be designed in such a way that the
job search effort is not negatively affected. Income support policies adopted at
European level have also included minimum-income benefits as well as income
support for low income workers. Active labour market program (ALMPs) spending
has scaled up when compared with passive spending in the last decade, but it seems
to be acyclical (OECD 2009) in absolute terms, with a small number of exceptions.
Some countries have also reinforced expenditures for public employment services.
Moreover, some specific measures, such as employment subsidies [including short-
term work (STW) schemes] and direct public job creation, have been expanded in
various European countries. For example, participation in STW schemes has
increased in many European countries, playing an important role in preserving
(permanent) jobs, through the encouragement of work sharing to reduce layoffs.
Furthermore, STW has reduced the loss of permanent employment by over 200,000
in Germany and by about 120,000 in Italy (OECD 2010). However, as STW just
preserves regular employment, it contributes to increased labour market segmen-
tation against temporary and part-time workers.
In this context, Italy has been extensively affected by the 2008–2009 economic
downturn, even though its situation appears to be better than many other European
countries. During the recession, the Italian GDP has fallen by 6%, but the
unemployment rate increased to just 8.6% in 2010 (ISTAT 2011), which is below
the EU average rate. This result has been achieved through the extensive use of
STW schemes, which have helped to mitigate the negative effect of the economic
crisis on the permanently employed. However, the economic recovery does not
seem particularly brilliant, and the effect of the crisis is likely to persist in the next
months. In Italy, the manufacturing sector has suffered most, mainly because of a
reduction in exports. Moreover, the rise in unemployment has not been homoge-
nous across workers groups. The male unemployment rate has risen more than the
female unemployment rate, primarily because of the reduction in labour market
participation of women. The youth unemployment rate has risen to 28.9%, opening
questions about the effectiveness of the structure of labour market policies in Italy.
1.4 Brief Summary of the Papers in the Book
We now briefly summarise the content of the book, presenting the summary of the
contributions according to the order in which they appear: (Sect. 1.4.1) deals with
general causes of social exclusion (i.e., health, education, and work conditions);
(Sect. 1.4.2) deals with some vulnerable groups who are most likely to be
associated with social exclusion (i.e., former criminals and disabled people); and
(Sect. 1.4.3) deals directly with the impact that the most recent crisis has had on
social exclusion through the labour market.
1.4.1 The Structural and Long-Term Causes

of Social Exclusion
Coppola’s model predicts that the effect of income growth on health can be
ambiguous, providing an explanation to the observed ‘‘health poverty trap’’. This
model provides micro foundations to Solow’s model of economic growth by
linking growth to health via considering the effect of lifestyle on growth. This
model centres on the concept of the lifestyle returns to scale that expresses the
elasticity of health with respect to income: a bad lifestyle implies that an increase
in income increases the consumption of commodities that are pernicious to health.
At the aggregate level, the Growth Model presented uses the Solow Growth
Model with a constant saving rate, diminishing returns of capital and labour,
labour augmenting technology, and constant returns to scale. The model develops
a health multiplier, on the assumption that health is labour augmenting; therefore,
individual choices about health affect society as a whole via externalities. How-
ever, lifestyle can also be an important channel to transmit economic growth to
health, depending on technological progress. Unlike economic growth, the rate of
health growth may be positive, null or negative, depending on the sign of the
Lifestyle Returns to scale: if it is negative, economic growth negatively affects
health.
Bucciarelli, Pagliari, Muratore, and Odoardi address the important issue of
investigating the connection between social exclusion and LR by analysing data
across 30 very diversified countries, some of which are OECD members, col-
lected for the period between 2007 and 2009. The topic under investigation is
important, as the LR and variables related to social exclusion can be seen as
proxies of human and social capital, which are essential for long-term devel-
opment. Knowledge of the variables that affect education is essential for poli-
cymaking purposes.
The paper has a comprehensive description of the statistical methodology that is
used in the investigation (i.e., multivariate regression analysis, maximum likeli-
hood with VARIMAX rotation, factor transformation matrix, factor analysis and
multivariate regression models with maximum likelihood components, and cluster
analysis). The paper is divided into several sections. Initially, it analyses LR as a
function of three groups of variables: variables strictly related to the educational
situation, i.e., school enrolment at three different levels and children out of school;
public intervention in education, expressed both in terms of general public
expenditures and in terms of GDP; and macro variables, such as real growth rate
and long-term unemployment rate. Because of the heterogeneity of the data, links
among the variables are not very evident. But, after applying the various methods
of analysis, it is found that LR can be affected by three components with the nature
of social exclusion variables, i.e., a synthetic indicator of social exclusion, an
indicator regarding educational level, and the GDP real growth rate. Most of the
countries analysed, including almost all of the OECD ones, show similar levels of
macro variables related to education, and instead differ on social exclusion. This
result means that all countries with medium or high levels of income per capita
show good levels of enrolment and attendance at school but that not all of them
can deal effectively with social problems. Finally, a detailed discussion of policy
towards literacy in the USA and Italy is discussed.
Veraschagina addresses the question of the role of education on social mobility
in 12 post-communist countries of Central Europe and the former Soviet Union.
Three hypotheses are tested: during the socialist era, the relation between the
education level of parents and their children weakened; the current levels of
educational mobility in post-communist countries are higher than in their Western
counterparts; and the transition to market economy caused an increase in educa-
tional persistence. Despite heterogeneity among countries, educational persistence
appears to decline sharply until the 1950s; however, evidence from later years does
not confirm this trend. To test the effect of this transition, identification of the
break was necessary. The CUSUM and the Chow test were used for this purpose,
and they showed that possibly not a single break occurred throughout the countries
but that additional breaks in the data referring to educational persistence took
place, on average about 10 years before the transition itself occurred. Moreover,
lower educational persistence in post-communist versus mature countries is con-
firmed by the evidence only for the generation born in the 1950–1960s. The
question of the sustainability of educational mobility was also investigated: the
increase of private returns to education (PRE), which the data show after the
transition, is expected to be associated with higher educational mobility.
This result is not confirmed by the evidence. A possible explanation is the shift in
the remuneration system, heavily relying on in kind transfers in the pre-transition
period, towards a completely monetary system of remuneration after the transition.
Taking this aspect into account, it is possible that the PRE has actually not been
altered. Unfortunately, the data do not allow an assessment of in kind transfers, so
the explanation provided here is a convincing speculation.
Nissi and Rapposelli apply the nonparametric technique Data Envelopment
Analysis to investigate comparative efficiency in terms of low numbers of acci-
dents at work to EUROSTAT data collected for 15 European countries in 2005, in
the sectors of manufacturing, construction and distribution trades. These sectors
were chosen because Europe registers the greatest number of accidents. Under the
traditional hypothesis of variable returns to scale, and under the specific
assumption of an input oriented approach, the paper develops the idea of unde-
sirable outputs, which only recently has been introduced in the literature and which
has mainly been applied to environmental studies. The results of this analysis show
that countries differ from each other with respect to efficiency in a different way,
according to the sector considered. In the manufacturing sector, four countries are
efficient (i.e., Germany, Ireland, Luxemburg, and the United Kingdom). They
make a total of four efficient countries in the construction sector as well; in the
distribution trades sector, Belgium and France join the other countries on the
efficient frontier, and Germany returns to being efficient, making a total of seven
efficient countries. The overall conclusion suggests that in the construction and
manufacturing sectors, the efficiency of reducing accidents at work can improve
considerably, while in the distribution trade sector, nearly 50% of the countries
considered are already efficient. Ireland, Luxemburg, and the United Kingdom are
efficient in all sectors considered, and Ireland and the United Kingdom are fre-
quently cited as exemplary efficient Decision Making Units, as they have a low
number of accidents at work.
1.4.2 Groups Structurally Vulnerable to Social Exclusion
The fragile groups considered in this part of the book include former convicted and
disabled people. Bowles uses various cross-sectional and longitudinal British data
sets to explore the relationship between crime and social exclusion, concentrating
the investigation on the human capital approach model of offending. According to
this model, crime is the result of a very high discount rate, leading to underin-
vestment in oneself. High discount rates can be explained in terms of a lack of
planning skills and an incapacity to anticipate the future, with special reference to
an inability to assess the dynamic consequences of offending. The formation of
this kind of individual preferences may be explained by variables that are inter-
twined with the concept of social exclusion. This model is well suited to explain
the offending behaviour of young people, who actually represent a large majority
of offenders. The variables that the data show to be correlated with offending are
experience of disadvantage as children, poor attendance at and exclusion from
school, exclusion from mainstream education, leaving school by the minimum
school leaving age, pre-custody drug use, and other crime victimisation rates.
Furthermore, reconviction rates appear to be related to prospects of unemployment
after release, and to problems of accommodation; the probability of reconviction
falls with age. There is also evidence of a comparatively high incidence of mental
health issues among prisoners. Of course, with all these factors, one cannot say
whether they are contributory factors to crime, or consequences of it, or whether
they both have a common cause. The policy implications of this model go well
beyond those of the punitive model of crime, and recommend both ‘prevention’
policies aimed at raising aspirations and encouraging investment in human capital,
and ‘resettlement’ policies. A problem connected with this model is that the
predicted benefits of intervention spill over a wide range of potential savings in
costs, which affect various government departments, and it may be difficult to take
all of them into account if, for the purpose of financing, the benefits have to be
assessed in terms of crime prevention only.
Sloane and Jones present a very thorough review of the literature on disability
that is likely to become a standard tool of reference in the field. They pay par-
ticular attention to disabled people and the labour market, commenting on a
variety of datasets, ranging from the European ECHP and the Australian HILDA to
the British BHPS. The review touches on most aspects related to disability:
variability of the percentage of people who declare themselves disabled, the
probability of employment and seriousness of disability, evidence on disability and
low income from work, both with cross-sectional and with longitudinal data, and a
discussion of additional expenditure requirements for disabled people. The defi-
nitional aspect of disability is thoroughly investigated, with special emphasis on
work limited disability, non-work-limited disability, and the non-disabled. Other
issues also thoroughly investigated are problems associated with the age of onset
of disability, with self-reporting disability, with the simultaneous relations
between health and labour supply and vice versa, and with state dependence.
A thorough review of the literature using a UK background is also provided. The
problem of possible discrimination against disabled persons is investigated, with
special attention on disability and productivity, the importance of education and
disability on employment and earnings, work limited and non-work-limited
disability, part-time employment and self-employment, gender, possible job
mismatches, and job satisfaction. A thorough review of policies related to
disability, including income support, employment quota systems, sheltered
employment, anti-discrimination legislation, and employment policies, is also
provided. Individually targeted employment policies are presented as the most
promising policies to help disabled individuals to retain and gain employment for
which they are most suited.
Agovino and Parodi investigate whether Italian civilian invalidity pensions are
used as a form of income support, analysing data at the level of individual
provinces. Their analysis proceeds in two steps: a panel analysis and a Gen-
eralized Method of Moments where the spatial variable is introduced. The first
step of the analysis aims at identifying possible differences in disabling health
conditions in various Italian provinces. For this purpose, information about the
discharges from hospitals of people suffering from possibly invalidating illnesses
is analysed. The results of this analysis show that there is no significant dif-
ference in this variable across provinces. Subsequently, the analysis is developed
on the link between civilian invalidity pensions and indicators of social malaise
such as poverty. The poverty rate appears always significant as a regressor of
civilian invalidity pensions, even when the spatial lag is introduced in order to
take into account similarities between provinces which may go well beyond
administrative boundaries, because of historical and socio-economic factors.
These findings reveal a degree of flexibility in the allocation of civilian invalidity
pensions, which appears to be inconsistent with the strict rules defined by the
law, and suggest discretionary interpretation according to the locally prevailing
socio-economic conditions. The unsuitability of civilian invalidity pensions as a
form of income support is stressed.
1.4.3 Effects of the Recent Crisis on the Labour Market
Papers dealing with the effects of the 2008–2009 economic downturn on labour
markets and its socio-economic consequences include some case-studies from Tronti
and Gatto, Addabbo, Garcia-Fernandez, Llorca-Rodriguez and Maccagnan (Add-
abbo et al. hereafter), Lilla and Staffolani and, finally, Lucarelli and Mussida. Spe-
cifically, Tronti and Gatto investigate the 2008–2009 recession in the context of the
Italian labour market, focusing especially on the problems that concern the unem-
ployment measurement and its consequences in understanding the phenomena.
Addabbo et al. study the impact of unemployment on the probability of being income
poor and on the difficulties of accessing medical and dental visits treatments in Italy
and Spain to draw lessons that can be extended to the economic crisis. Finally, both
Lilla and Staffolani and Lucarelli and Mussida, focus on unemployment dynamics in
Italy clarifying the role of the 2008–2009 recession on labour market transitions.
Tronti and Gatto stress the relevance of considering various unemployment
measures to avoid shortcomings in evaluating the socio-economic impact of the
2008–2009 recession. According to official statistics, according to the standards
defined by the International Labour Office, the unemployment rate has risen to
8.6% in 2010, as a consequence of the strong economic downturn. Nevertheless,
the actual impact of the recession may be greater if the meaning of unemployment
is extended to include the concept of the labour underutilisation rate. Specifically,
Tronti and Gatto show that, considering relevant phenomena such as the dis-
couragement effect, with specific STW schemes providing for working zero hours
(Cassa Integrazione Guadagni), labour hoarding and semi-employment (atypical
workers), the resulting labour underutilisation rate is almost double the standard
unemployment rate. This finding has relevant implications when we consider the
impact of the crisis on the socio-economic conditions of individuals and house-
holds. Moreover, it changes the debate about the adequacy of official definitions of
unemployment in providing a reliable measure of the phenomenon and its
implications (see also Brandolini et al. 2006).
Addabbo et al. analyse the effect of being unemployed on the probability of
being income poor and on the difficulties of accessing medical and dental visits
treatments in Italy and Spain using 2007 IT-SILC/ES-SILC data. The authors also
describe the different unemployment insurance systems and the effect of the
economic crisis on both labour markets. Overall, Addabbo et al. find that being
unemployed increases the probability of being income poor and, partially, the
difficulties of accessing to medical and dental treatments in both countries. In Italy,
the effect is stronger for the previously self-employed now unemployed while in
Spain it is stronger for the unemployed who were never employed before. These
findings are relevant in analysing the possible effects of the 2008–2009 economic
downturn on households’ well being, considering the structure of welfare systems
with specific attention to the unemployment insurance systems.
Unemployment dynamics in Italy during the last few years have been studied in
two papers. The evidence from both of the papers is quite consistent, even though
some differences emerge, probably because of some differences in model speci-

fications and because of the data sets used. The results seem to reveal a strong
duality in the Italian economy, as the recession has had a strong impact on dis-
advantaged categories. Overall, young workers and immigrants have suffered more
than other groups during the jobs crisis because recent flexibility policies have
banished them from temporary employment. This finding raises questions about
the role of labour market policies and supports in Italy.
Specifically, Lilla and Staffolani use the ISTAT Labour Force Survey micro-data
to evaluate the consequences of the 2008–2009 economic crisis on the Italian labour
market by analysing the determinants of individuals’ transitions between occupa-
tional states. They use two different strategies to identify the determinants of tran-
sitions: first, they consider the ‘‘perceived’’ employment condition, available at the
individual level for the previous year; and, second, they use the ‘‘ecological infer-
ence’’ approach, i.e., they get quarterly transition probabilities for the ‘‘official’’
employment condition. The estimation results confirm that during the crisis young
workers, men, immigrants, and individuals in the north of Italy faced the major risks
of becoming unemployed, while women, middle-aged and northern individuals had
major troubles in finding a job. With respect to the family types that were analysed
in the paper, the most affected individuals belong to ‘‘couples without children’’ and
to ‘‘single parents without children’’. They experienced severe reductions in
employment stability along with an increase in the transitions to unemployment.
Finally, Lucarelli and Mussida provide a picture of the labour market transitions
in Italy for the 2004–2009 period, with specific attention on the effects of the
2008–2009 economic downturns. The authors find that particular characteristics
reduce the negative impact of the economic downturn. The individual character-
istics that increase the chances of remaining in employment emerge as being male,
no longer belonging to the ‘‘young’’ age group, and holding a high educational
qualification. Moreover, they find that full-time workers have a lower probability
of exiting employment. The same effect emerges for occupations requiring high
qualifications. With regard to outflows from inactivity, women appear less likely to
exit the nonlabour force. This finding indicates a strong discouragement effect for
women, especially at the beginning of their working career. Holding low quali-
fications and unfavourable labour market conditions inevitably exacerbate the
situation. All of these findings suggest a greater negative impact for disadvantaged
labour market groups, which leads to a widening of labour market duality. The
authors discuss changes in government labour policy promoted to fight the neg-
ative effects of the economic crisis on labour market outcomes.
1.5 Conclusions
The contributions to the book have emphasised the circular aspects of social
exclusion. Factors that generate social exclusion are themselves an effect of social
exclusion. Groups that are traditionally considered fragile, such as disabled people
and formerly convicted people, are particularly vulnerable to social exclusion.

Articles on the 2008–2009 economic downturn make clear that regarding social
exclusion, the crisis has affected a much wider range of people, including youths,
low-skilled workers and immigrants, in terms of income, job loss, job finding, even
participation. The result is a widening of socio-economic duality. The relevance of
definitions of socio-economic outcomes for measurement and evaluation of the
crisis have also been stressed, and their consequences for interventions of poli-
cymakers in fighting socio-economic effects of the economic downturn.
It has been said above that social exclusion is both an indicator of discomfort
for the people who suffer it and a threat to social cohesion, so policy interventions
to address social exclusion are required, on both grounds. However, both the
situation of specific disadvantaged groups and the asymmetric effect of the crisis
open questions about the effectiveness of the welfare system in addressing and
mitigating social exclusion. Given these premises, a revision of the welfare
structure should be considered, taking into account, for example, the changes in
labour market institutions introduced in the last few decades.
Finally, it seems desirable that the European Union should impose to member
countries parameters to be respected, and not only targets and guidelines, in terms
of social indicators, so that countries too remote, for instance, from the Lisbon
(original and revised) targets may find themselves under threat of sanctions.
References
Adato M, Carter MR, May J (2004) Sense in sociability? social exclusion and persistent poverty
in South Africa, University of Wisconsin-Madison, Department of Economics and Agricul-
tural Economics, Staff paper, No. 477
Bentolila S, Cahuc P, Dolado JJ, Le Barbanchon T (2010) Two tier labour markets in the great
recession: France vs. Spain. Paper presented at the XXV simposio de la asociaciòn espanola
de economia, Madrid, December 2010
Brandolini A, Cipollone P, Viviano E (2006) Does the ILO definition capture all unemployment?
J Eur Econ Assoc 4(1):153–179
Chakravarty SR, D’Ambrosio C (2003) The measurement of social exclusion, DIW, German
Institute for economic research, Berlin, Discussion papers 364
Chakravarty SR, Zoli C (2009) Social exclusion orderings, Working paper series, University of
Verona
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European union 2010. Eurostat statistical books, http://ec.europa.eu/social
EUROSTAT (2010) Official statistics. http://ec.europa.eu/eurostat
ISTAT (2011) www.istat.it
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union institute
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social exclusion: lessons from Europe? J Policy Anal Manage 29(2):305–325
OECD (2009) Employment outlook: tackling the jobs crisis. Paris
OECD (2010) Employment outlook: moving beyond the jobs crisis, Paris
Part I
The Structural and Long Term
Causes of Social Exclusion
Chapter 2
Health, Lifestyle and Growth
Gianluigi Coppola
Abstract In this article, I attempt to explain why lifestyle may have a positive
impact on economic growth. First, I consider the ways in which health affects a
consumer’s utility, and I then define a Health Production Function for which health
is the output and consumer good is the input. In this approach, the Lifestyle Return
to Scale (LRS) parameter is defined. The first result is that an increase in a
consumer’s personal income may have a positive or a negative effect on health.
That is, health may be a normal or an inferior good, depending on the Lifestyle
Return to Scale value. According to this result, I compute a health multiplier and
then modify the Solow Growth Model in which health is labour-augmenting. The
result is a model in which the Lifestyle Return to Scale positively affects per capita
income and per capita income growth.
Keywords Health Lifestyles Growth

JEL Classification I10 O40
2.1 Introduction
At the macro level, stylized facts indicate substantial differences in per capita
income and health status among countries and regions. This may imply that low
per capita incomes negatively affect health and vice versa.
G. Coppola (&)
Dipartimento di Scienze Economiche e Statistiche,
Universita’ Degli Studi Di Salerno and C.E.L.P.E, Salerno, Italy
e-mail: glcoppola@unisa.it
18 G. Coppola
In the last 20 years, the literature on economic growth has focused primarily on
the role of human capital accumulation, while health has occupied only a marginal
role in economic analyses. Second, if the income and health differences among
countries are significant, those among regions are even stronger and are essential
to economic growth.
The literature on health and health economic growth has not considered the
impacts that lifestyle has on Economic Growth. The aim of this theoretical paper is
to develop the relationship between Health and Growth by accounting for con-
sumer lifestyles.
Contoyannis and Jones’s hypothesis (2004) introduced a micro-model of con-
sumer choice to define lifestyles more accurately and to explain the effects of
consumers’ choices on Health. At the macro level, Weil (2005) asked if the forces
driving differences among regions were primarily derived from health or income.
In this context, I provide an answer by computing a health multiplier (Sect. 2.2)
and developing a simple modified Solow growth model in which health is labour-
augmenting (Sect. 2.3). Thus, this model includes the relationship among income,
lifestyle and health status first obtained at the micro level.
The first important result is that an increase in a consumer’s personal income
may have a positive or a negative effect on health if the consumer has a ‘‘good’’ or
a ‘‘bad’’ lifestyle, respectively. At the macro level another result of the model is
that lifestyle may be crucial for growth: a ‘‘good’’ lifestyle can generate a positive
impact on economic growth, while a ‘‘bad’’ lifestyle may also negatively affect
growth. The model also explains why health improvement positively affects
income, while increasing income may have a lower effect on health (Weil 2005).
2.2 Some Empirical Evidence
The empirical evidence can be divided into two categories: Long-Run ‘‘stylized
facts’’ and facts related to government’s measures against the unhealthy habits of
the citizens.
The long-run ‘‘stylized facts’’ show increases in per capita income and life
expectancy. From 1820 to 2001, the per capita World GDP grew from $667 to
$5.709 (Maddison 2003). In the same period, world life expectancy at birth
increased from 28.5 years in 1820 to 65.2 years in 1990.
The differences among regions, in terms of both per capita GDP and life
expectancy at birth, have also increased (Riley 2005). In 1998, the per capita GDP
of the United States was 20 times that of Africa, while in 1820, it was only 3 times
larger.
In the period from 1800 to 1820, the differences among regions, in terms of life
expectancy at birth, were relatively low compared to the period from 1990 to 2001.
In the first period, the difference between the highest and the lowest regional life
expectancies was only 9.2 years. This gap widened to 26.3 years in the period
from 1990 to 2001 (Riley 2005).
2 Health, Lifestyle and Growth 19
These disparities may be explained by differences in Public Health, Medical

diagnostics and care, diet and, more generally, lifestyle.
As regards the second aspect, the government’s measures, it exists a lot of
evidence of the importance that people’s lifestyle assumes.
For example, in England, many local governments offer incentives to encourage
consumers to lead healthier lifestyles. In Dundee, smokers are offered £12.50 a
week by the NHS if carbon monoxide testing shows that they have quit. In Essex,
pregnant women can claim a £20 food voucher from the NHS when they stop
smoking for one week, £40 after four weeks and another £40 after one year.
Brighton offers children £15 to stop smoking for 28 days. Overweight patients in
Kent are offered incentives for losing weight. In the US and other countries,
incentives are offered for weight loss, compliance with diabetes treatments, or
regularly testing negative for sexually transmitted diseases.1
Moreover, in Japan, a national law against obesity came into effect in 2008.
Under this law companies and local governments must measure the waistlines of
Japanese people between the ages of 40 and 74 during annual checkups.
In Italy, phrases warning consumers of the damage caused by smoking are
printed on cigarette packs, which are sold by a state monopoly. On some packages,
the following sentences appear: ‘‘Smoking while pregnant harms your baby;
smoking kills’’.
These examples demonstrate government concern with lifestyles and the
implementation of policies to change consumption habits. In so doing, many
governments heavily influence individual’s choices.
What determines this intrusive government interest? By reasoning backward,
government interest produces a conflict between individual and social choices that
originates in two factors: the rising cost of health care in many Western nations
and the assumption that bad lifestyles may negatively affect labour productivity.
Zargosky (2005) demonstrated a large negative association between Body Mass
Index (BMI) and White females’ net worth, a smaller negative association for
Black women and White males and no relationship for Black males in the US.
He also found that individuals who lose small amounts of weight experience small
changes in their net worth, but those who lose large amounts of weight have
improved financial positions.
For households in Sierra Leone, Strauss (1986) found a highly significant
relationship between caloric intake and labour productivity, providing solid sup-
port for the nutrition-productivity hypothesis. The marginal effect on productivity
decreases drastically as calorie consumption increases but remains positive at
moderately high levels of intake. One result from this situation is a decrease in the
effective price of food that is more significant for households that consume fewer
calories.
In general, it can be argued that health has a positive effect on the labour
productivity of individuals. Thus, lifestyle choices, such as smoking and drinking,
1
Financial Times Cash incentives seen as helping nation’s health, 11 April 2009.
20 G. Coppola
of individuals are of interest to society and, also to firms because they affect labour
productivity.
Ultimately, lifestyle choices generate externalities, a term that indicates pos-
sible conflicts that have not been resolved by the market. Externalities affect labour
productivity and healthcare costs above and beyond the level for which companies
are responsible. This relatively new concept of externalities is explained by Sassi
and Hurst (2008):
………Lifestyle choices, as many other forms of consumption, may produce external
effects. There are immediate externalities that derive directly from acts of lifestyle con-
sumption, such as passive smoking, violent and disorderly behaviour associated with
alcohol abuse, or traffic accidents resulting from reckless driving. There are also deferred
externalities, which are generated through the link between lifestyle choices and chronic
diseases. Once chronic diseases emerge, and in some cases even before they emerge (e.g.,
when important risk factors such as hypertension or obesity begin to manifest themselves),
the individuals affected will become less productive, possibly entirely unproductive, they
will make a more intensive use of medical and social services, which may be publicly
funded, they may require care by members of the family and friends. Conversely, a
reduced life expectancy may mean a less prolonged use of publicly funded medical and
social services at the end of life, as well as reduced pension payments, which are not
themselves externalities, but would translate into a less onerous fiscal burden and therefore
less distortion in the way the economy works. All of these phenomena involve external-
ities (negative the former, positive the latter) on society at large, family and friends, which
can be attributed at least to some extent to the lifestyle choices originally made by the
individual. The extent to which externalities can be associated with lifestyle choices
depends, of course, on the strength of the link between lifestyles and disease, i.e., by the
increase in the risk of developing a chronic disease associated with adopting a particular
lifestyle.
These arguments are not new. John Stuart Mill (1859) wrote the book On
Liberty to fight against laws that would limit individual freedom. In the nineteenth
century in Great Britain, social degradation phenomena such as alcoholism were
prevalent. Several social movements asked the government to implement prohi-
bitionist measures to halt these phenomena. Mill contrasted these ideas,
arguing that
what happens inside a person’s body or mind is that person’s private business, not the
business of society and certainly not the business of the government ………over himself,
over his own body and mind, the individual is sovereign.
2.3 A Micro-Model
In the following section, I define lifestyle and develop a micro-funded model that
explains the relationship between health and income and the effects of income on
health.
First, let us suppose that an economy produces 3 goods: 2 commodities for

consumption, x and z, and Capital, K. The saving rate, s, is exogenous and
constant.
According to the Grossman model (1972), health capital and the demand for
health have been widely modelled in the economic literature.
Contoyannis and Jones (2004) developed a static model of lifestyle and health
production. In this model, (1) income is assumed to be endogenous, but there is no
direct influence of lifestyle or health on wages; (2) health affects consumer utility,
unlike Grossman’s dynamic model (1972) in which health is considered to be a
stock that produces flows of pecuniary and non-pecuniary benefits as a result of
investments; (3) health is a result of a production function in which the inputs are a
vector of goods, a vector of exogenous influences on health and a vector of
unobservable influences on health; and (4) the money budget constraint and the
time constraint close the model. As a result of these conditions, the following are
maximised: consumer utility, using a Lagrangian function, the Marshallian
demand for goods and the level of consumer Health.
Contoyannis and Jones (2004) set the Health Production Function (HPF)
equal to
H ¼ hðC; XU ; UH Þ ð2:1Þ
where H is a measure of individual health; C is a vector of M goods; XU is a vector
of exogenous variables that influence health; and UH is a vector of unobservable
influence on health.
In this article, the model of Contoyannis and Jones (2004) is augmented to
produce a model with 2 equations: (1) the consumer utility function and (2) the
health production function.
2.3.1 The Consumer Utility Function
The consumer utility function is assumed to be a Cobb Douglas function in which

health, h, is an input. For this reason, health affects the consumer utility function
(among others, Kip Viscussi and Evans 1990). The other 2 inputs are the com-
modities x and z. The utility function can be written as
U ðh; x; zÞ ¼ ha xb zd ð2:2Þ
Where a; b and dare the elasticities of h, x and z, respectively.

Equation a 0 may be considered as the self-assigned weight of a consumer to
his/her own health. If a ¼ 0; health is not important to the consumer. On the
contrary, if a [ 0; then health is important.
b; d \
[ 0: If b\0 or d\0; x or z is not a good but a ‘‘bad’’ for the consumer
(Varian, 1992).
22 G. Coppola
This is a static model. There is no rational addiction, but positive elasticity

values indicate that a consumer knows the commodity’s ophelimity.
2.3.2 The Health Production Function
Contoyannis and Jones (2004) assume that the utility of a consumer depends on a
set of goods C, Health H, XU ; a vector of observable exogenous influences on
U and lU , a vector of unobservable influences or U, defined by
U ¼ uðC; H; XU ; lU Þ ð2:3Þ
Furthermore, HPF depends on a set of goods C, a vector of observable exog-
enous influences on H, XH ; and a vector of observable exogenous influences on H,
lH : The vector H is defined by
H ¼ hðC; XH ; lH Þ ð2:4Þ
It is assumed that the consumption of a commodity can improve, worsen or
have no effect on the health of a consumer. Consumption can worsen health in the
case of smoking, alcohol and drugs.
For simplicity, let us assume that every commodity can only better or
worsen the health of a consumer. Further, no commodities can positively impact
health in small quantities and negatively impact health in stronger doses.2 It is also
assumed that x improves health, while z worsens health. The commodity x may be
defined as the virtuous, or sustainable, good, and z may be defined as the harmful
good.
Health also depends on the initial level of health ðh0 Þ; public health ðWÞ; time
t and a stochastic component e: The Health Production Function is
hðx; z; h0 ; w; t; eÞ ¼ xq zc h0 we/t ee ð2:5Þ

The function can be split into two parts: xq zc can be interpreted as a con-
sumer’s activity, and h0 we/t ee can be attributed to other factors. To simplify the
model, we use the relation X ¼ h0 we/t ee : The HPF is then
hðx; z; h0 ; w; t; eÞ ¼ Xxq zc ð2:6Þ
In this health production function, there is one input, x, with a positive mar-
ginal productivity. This assumption is compatible with the neoclassic production
function theory (Gravelle and Rees 1992). The term ðq cÞ is equal to the elas-
ticity of scale and can be positive, negative or null. Let h ¼ q c: Each input is
2
The ancient Romans said ‘‘In Medio stat Virtus’’. In the model that hypothesis doesn’t matter
for each single good.
assumed to exhibit a decreasing return; thus, 0\q\1; 0\c\1; and, therefore,

1\h\1:
Sassi and Hurst (2008) related individual lifestyles to individual behaviours that
affect health. Contoyannis and Jones (2004) also defined lifestyle ‘‘as a set of
behaviours which are considered to influence health and are generally considered
to involve a considerable amount of free choice’’.
If h [ 0; consumption increases positively affect health, while for h\0; con-
sumption increases negatively affect health. With h ¼ 0; consumer behaviour has
no effect on health. For this reason, the parameter h may be defined as the Lifestyle
Return to Scale (hereafter LRS).
Before maximising the consumer utility function, hðx; z; h0 ; w; t; eÞ ¼ Xxq zc is
substituted into U ðh; x; zÞ ¼ ha xb zd to yield
U ðh; x; zÞ ¼ Xxaq zac xb zd ð2:7Þ
or
U ðh; x; zÞ ¼ Xxaqþb zdac ð2:8Þ

The elasticity with respect to x becomes aq þ b; and the elasticity with respect
to z becomes d ac:
The commodity x (or z) will be consumed only if aq þ b [ 0 (or d ac [ 0;)
that is, if the relative elasticity is positive. The other properties of the utility
function are the same as before.
Hence, the choice to consume x (or z) depends on 3 parameters: (1) the elas-
ticity of utility with respect to x (or z) b (or d), that is, the weight conferred by the
consumer to the commodity x (or z); (2) a, the importance of health to the con-
sumer; and (3) the benefit (or damage) of x (or z) on health b (or c ).
For example, an individual will consume a medicinal (x) only if the positive
health impact ðaqÞ is given a value greater than the elasticity with respect to x (b).
On the contrary, a consumer will not drink alcohol if alcohol is not preferred
ðd\0Þ or if alcohol is enjoyed ðd [ 0Þbut he assumes the negative impacts on
health ðacÞ to be greater than the elasticity of alcohol’s utility ðd ac [ 0Þ:
A consumer may decide to drink alcohol even if the dangerous health effects are
known. Further, consumers who are aware of the damage of smoking may con-
tinue to smoke.3 Following this approach, alcohol consumption depends also on
factors other than the level of a consumer’s education.
Generally, by including health in the consumer utility function, the consump-
tion of commodities that benefit health increases, while the consumption of goods
that cause damage decreases because a [ 0.
3
See for example Berger and Leigh (1989) and Kenkel (1991) for the relationship between
schooling and health. See also Avitabile (2009) for the relationship between health and
information.
24 G. Coppola
2.3.3 The Utility Maximization Problem: The Optimal

Choice of x, z and h
Let X ¼ 1: The consumer’s budget constraint is px x þ pz z ¼ cy; where px ; pz are

the prices of the goods; y is the per capita income used for consumption, y ¼ YL ;
c is the average propensity to consume ð0\c\1Þ; and L is the population. The
consumer maximizes utility when maxx;z xaqþb zdac such that px x þ pz z ¼ y.4
Recall that aq þ b [ 0 and d ac [ 0:
Optimally solving the Lagrangian maxx;z L ¼ Uðx; zÞ kðpx x þ pz z yÞ; where
k is the Langrage Multiplier, the quantities of commodities consumed are
(Mas-Colell et al. 1995)
aq þ b cy
x¼ ð2:9Þ
b þ d þ að q cÞ p x
d ac cy
z¼ ð2:10Þ
b þ d þ aðq cÞ pz
The weight of health, a; increases the consumption of ‘‘virtuous’’ goods and
reduces the consumption of harmful goods. Optimally, the health level is

aq þ b cy q d ac cy c
h¼ ð2:11Þ
b þ d þ að q cÞ p x b þ d þ aðq cÞ pz
or
q c

aq þ b d ac ð pz Þ c
h¼ ðcyÞðqcÞ ð2:12Þ
b þ d þ að q cÞ ðpx Þq
b þ d þ að q cÞ
q
aqþb
Equation 2.11 is the health demand function, where bþdþa ðqcÞ and
c
dac
bþdþaðqcÞ are the shares of good x and good z, respectively, weighted for
their relative health elasticities.
The level of health and the price of virtuous good are negatively correlated.
If the price of good x increases (or decreases), it worsens (or improves) the level of
health. Conversely, health improves (or worsens) if the price of z increases
(or decreases).
The health elasticity with respect to income is q c ¼ h; the parameter LRS.
Unlike the parameters that can have only one sign, this parameter may be positive
or negative. If q c ¼ 0; income growth does not affect the level of health.
If q c\0; income negatively affects health. If q c [ 0; income positively
affects health.
4
This approach may be considered as a generalization of Wagstaff’s model (1986). See
Appendix for details.
Thus, income growth does not always positively affect health. The sign and the
degree to which income affects health depend on the parameter h:
A proxy or Index of a consumer’s Lifestyle (LI) may be given by the weighted
average of the quantity of commodities consumed for the consumer’s health
elasticity. This variable follows the relationship 1\LI\1 and is given by

aq þ b d ac
LI ¼ q c ð2:13Þ
b þ d þ að q cÞ b þ d þ að q c Þ
Therefore, LRS h is a crucial variable in the model because it indicates the
attitude of a consumer, based on preferences and opportunities, toward leading a
particular lifestyle. Thus, h ¼ q c partially and indirectly reflects consumer
preferences because the health production function contains only those com-
modities that consumers prefer or can purchase.5
2.4 Comparative Static: The Health Multiplier
In the previous section, the effects of income on health were described. Assuming
the existence of a representative agent, Eq. 2.11 can be rewritten as
h
Y
h¼t ð2:14Þ
L
q c c
aqþb dac ðpZ Þ
where m ¼ bþdþa ðqcÞ bþdþaðqcÞ ðpx Þq
c
A production function with a constant return to scale and for which both
technology and health are labour augmenting is assumed. This may be a Cobb
Douglas Production Function (i.e. Weil 2005; Sala-i-Martin 2005).
Y ¼ K a ðAhLÞ1a ð2:15Þ
or
5
Three issues should be highlighted here. First, in this simple consumer model, choices are
made between two commodities. In reality, a commodity may be not consumed for three reasons,
the first two of which were outlined previously: (1) the consumer does not like a commodity;
(2) even if a commodity is liked, the health damage caused by the commodity may be greater than
the commodity’s utility, preventing consumption of the commodity; and (3) the relative price of a
commodity may be greater than income, preventing consumption of the commodity. In the first
two cases, the commodity is not consumed as a result of free choice. In the second case, this
choice may be difficult. In the third case, price and income limits restrict access to the
commodity. In this article, we consider only the case in which individuals consume both
commodities.
26 G. Coppola
a
Y K
¼ ðAhÞ1a ð2:16Þ
L L
From the system given by Eqs. 2.14 and 2.15, the impacts of a ‘‘health shock’’
ðDmÞ and an ‘‘income shock’’ ðDAÞ on health and income can be quantified.
Solving this system yields the effects in terms of elasticity. The results are
reported in Scheme 1 for 0\h\1:
Scheme 1
On health On income
1\h\1
Health shock d log h 1 d log Y ð 1 aÞ
¼ ¼
d log m 1 hð1 aÞ d log m 1 hð1 aÞ
Income shock d log h hð1 aÞ d log Y ð 1 aÞ
¼ ¼
d log A 1 hð1 aÞ d log A 1 hð1 aÞ
1
In terms of elasticity, the health multiplier is equal to 1hð1aÞ for health and
ð1aÞ
1hð1aÞ for income.
For 0\h\1; both multipliers are positive and greater than one. If a lifestyle is
positive, a health shock will more strongly affect health and the growth of labour
productivity.
The effect of a health shock on income depends positively on both LRS and
income elasticity, with respect to labour or labour income share.
hð1aÞ
The effect of an income shock on income is equal to 1h ð1aÞ ; while the effect
ð1aÞ
on health is equal to 1h ð1aÞ : In this case, for 0\h\1; both effects are greater
than zero.
The question of whether a health shock more strongly affects income or an
income shock more strongly affects health (Weil 2004) can now be answered: both
technological and health shocks produce the same effect on income. This effect is
ð1aÞ 1
equal to 1h ð1aÞ ; which is greater than ð1 aÞ because 1hð1aÞ [ 1:
A health shock has an impact on health equal to 1hð11aÞ ; which is greater than
ð1aÞ
an income shock 1hð1aÞ because 0\h\1: A health shock has an impact on
ð1aÞ hð1aÞ
income equal to 1hð1aÞ ; which is greater than
an income shock on health 1h ð1aÞ :
The effect that a reduction of the price of commodity x has on health can be
quantified. The multipliers for income and health are
d log h d log h d log t 1
¼ ¼ q ð2:17Þ
d log px d log t d log px 1 hð 1 a Þ
d log Y d log Y d log t ð1 aÞ

¼ ¼ q ð2:18Þ
d log px d log t d log px 1 hð1 aÞ
The effect of a price shock for x on health is equal to 1hð11aÞ q: It depends
1
both on the multiplier 1hð1aÞ and negatively on the parameter q; which is the
ð1aÞ
health elasticity of x. The impact on income is 1h ð1aÞ q; which is the product of
the impact of the price of x on health, 1hð11aÞ q; and the impact of health on
income, ð1 aÞ. This impact has a negative sign because a reduction in the price
of x positively affects health and income.
Scheme 2 lists these health multipliers.
Scheme 2
On health On income
Health shock dh 1 dY ð1 aÞ Y
¼ Yh ¼
dm 1 hð1 aÞ dm 1 hð1 aÞ t
Income shock dh hð1 aÞ h dY ð1 aÞ Y
¼ ¼
dA 1 hð1 aÞ A dA 1 hð1 aÞ A
2.5 A Growth Model with Health
In the comparative static framework, the level of population is constant. In this

section, I present a Growth Model that includes health as an input factor and also
considers lifestyle.
Interactions between health and economic growth are complex (Morand 2005).
Listing all of these interactions is beyond the scope of this paper. One of the positive
effects of economic growth on health is the possibility of consuming higher
quantities of better quality goods. Another consequence of economic growth is that
technological progress positively impacts medical technology and care.
Therefore, health may have a positive impact on Growth through several
channels. First, health may positively affect labour productivity (Marshall 2006).
In Chapter V, titled ‘‘The Health and Strength of the Population’’, in Book 4 of the
Principles of Economy, Marshall wrote that
strength, physical, mental and moral, are the basis of industrial efficiency, on which the
production of material wealth depends; while conversely the chief importance of material
wealth lies in the fact that, when wisely used, it increases the health and strength, physical,
mental and moral, of the human race.
For Streeten (1994), one of the reasons for promoting human development is
that a well-nourished, healthy, educated, skilled and alert labour force is the most
important productive asset.
28 G. Coppola
In the Neoclassic Economic Growth literature, many models consider health as

a factor of growth. Lòpez-Casasnovas et al. (2005) and Rivera and Currais (1999a)
used a conditional convergence regression in which the growth of per capita
income is a function of steady-state determinants. Assuming that health is an
important determinant of an enhanced labour force, they showed that health affects
income growth both positively and significantly. In another article (Rivera and
Currais 1999b), investment in health significantly explained variations in the
output of human capital, even in countries with presumably high levels of health.
Heshmati (2001) extended the model of Mankiw et al. (1992) by incorporating
health. The results show that Health Care Expenditures positively affect economic
growth and the speed of convergence.
For Morand (2005), increasing longevity may incentivise agents to increase
investments in capital and human capital and thereby reinforce economic growth.
One of the main goals of this article is to consider the effects of individual
lifestyles on economic growth. Let us now consider a Solow Growth Model
(Solow 1956) with a constant saving rate (s), diminishing returns of capital
ð0\a\1Þ and labour, Labour-augmenting technology and constant returns to
scale. We assume a Cobb Douglas production function:
Y ðtÞ ¼ K ðtÞa ðAðtÞLðtÞÞ1a ð2:19Þ
where K(t), A(t), L(t) are capital, level of technology, and labour, respectively.
Let us assume all the hypotheses of the Solow’s Growth Model.
Technological progress and the population growth rate are exogenous and
d ln AðtÞ d ln LðtÞ
constant: ¼ g; ¼ n:
dt dt
Assuming that health is a labour-augmenting factor (Weil 2005; Sala-i-Martin
2005), the production function becomes
Y ðtÞ ¼ K ðtÞa ðAðtÞhðtÞLðtÞÞ1a ð2:20Þ
With
h
Y
h
h ¼ ty ¼ t h ¼ tY h Lh ; ð2:21Þ
L
this becomes
1a
Y ðtÞ ¼ K ðtÞa AðtÞtY ðtÞh LðtÞð1hÞ ð2:22Þ
or
a
1h1a
Y ðtÞ ¼ K ðtÞ1hð1aÞ AðtÞtLðtÞð1hÞ
ð1aÞ
ð2:23Þ
Equation 2.23 can be rewritten as

a
1 1
ð1hÞð1aÞ
1hð1aÞ
Y ðtÞ ¼ K ðtÞ1hð1aÞ AðtÞ1h t1h LðtÞ ð2:24Þ
aþð1hÞð1aÞ
Equation 2.24 shows a constant return to scale because 1hð1aÞ ¼ 1.
a ð1hÞð1aÞ
Substituting a1 ¼ 1hð1aÞ and a2 ¼ 1hð1aÞ ¼ 1 a1 yields
1 1
1a1
Y ðtÞ ¼ K ðtÞa1 AðtÞ1h t1h LðtÞ ð2:25Þ
This is a Solow’s Model, and the ‘‘new’’ technological rate is

1
d ln A2 ðtÞ d ln AðtÞ1h 1
dt ¼ ¼
dt 1h g
At equilibrium, the Income growth rate and per capita income growth rate are

d ln YðtÞ 1
¼ gþn ð2:26Þ
dt 1h

d ln YðtÞ
LðtÞ 1
¼ g ð2:27Þ
dt 1h
The income level is
a
Y ðt Þ 1 1 s ð1hÞð1aÞ
¼ ðAð0ÞvÞ1h e1hgt g ð2:28Þ
LðtÞ 1h þ n
The Health growth and Health level are

d ln hðtÞ d ln YðtÞ
LðtÞ 1
¼h ¼h g ð2:29Þ
dt dt 1h
ð1hahÞð1aÞ
1 h h
1h 1hgt
s
hð t Þ ¼ t ð A ð 0Þ Þ e
1h
g ð2:30Þ
1h þ n
The first result is that even if the Solow model with health remains an exog-
enous growth model, the parameter LRS positively affects per capita income
growth and the level of income per capita at the steady state.
For example, if h ¼ 0:5; the income growth rate is equal to 2g; while a negative
LRS ðh\0Þ results in a per capita income growth rate that is less than that of
technological progress. Thus, a ‘‘good’’ lifestyle can improve economic growth,
while a ‘‘bad’’ lifestyle can slow growth.
The second result is that health increases more slowly than per capita income.
Unlike economic growth, the rate of health growth may be positive, null or neg-
ative, depending on the sign of the LRS parameters. For h\0; economic growth
negatively affects health, which worsens.
30 G. Coppola
Fig. 2.1 The effect of LRS h

on the growth rate of per
capita income with a constant
technological growth rate
(g = 2%)
The second scenario may be the case of a ‘‘health-poverty trap’’. Such a trap
was noted in Russia; male life expectancy, which can be considered a health
indicator, plummeted by 7 years from 1989 to 1994 because of high levels of
alcohol consumption (UNDP 2010).
The results of the model can be explained differently. Per capita income growth
depends on the product of the technical progress parameter and LRS, both of
which are exogenous.
Technical progress is considered to be ‘‘manna from heaven’’. In fact, the aim
of the endogenous growth theory is to identify those factors and mechanisms that
could be controlled by the government to ensure higher and more durable eco-
nomic growth.
In the model presented in this article, another exogenous parameter, the Life-
style Return to Scale, h, impacts economic growth. In the introduction, we pre-
sented several cases in which governments have attempted to control lifestyles.
This type of governmental behaviour has several possible explanations.
Equation 2.27 can be re-written as
g
h ¼ 1 YðtÞ ð2:31Þ
d ln LðtÞ
dt
Suppose that the government has established a target for its economic growth
rate, denoted by ^y ; that can be controlled by technological progress g. If ^y [ g;
the economic growth rate fixed by the government is greater than technical pro-
gress, and the government can strive for higher growth by controlling or trying to
modify lifestyles, which are one of the channels that transmit the effects of eco-
nomic growth to health. Conversely, if technological progress is high, lifestyles
may not be important because technological progress can ensure a high level of
economic growth.
Further, health growth is equal to economic growth multiplied the parameter h.
As shown in Fig. 2.1, with a fixed a technological rate g, the effects of economic
growth on health improvement depend on the value of h. Lower values of h, result
in weaker links between economic production and health improvements. This
relationship could become negative for h \ 0. Hence, economic growth is a
necessary but not sufficient condition for improving health. If a government’s

priority is to improve health rather than economic growth, then LFS must be
positive. In this scenario, the conflict between public and private interests can
become stronger.
2.6 Conclusions
In this article, I attempted to formalize what Jean Anthelme Brillat-Savarin, the

author of Philosologie of taste Brillat-Savarin 2004, wrote two hundred years ago:
(1) animals feed themselves; men eat, but only wise men know the art of eating,
and (2) the destiny of nations depends on the manner in which they are fed.
The crucial hypotheses of the model are that (1) individuals can rationally
choose to consume goods that negatively affect health, (2) individuals are
co-producers of their health and (3) health positively affects labour productivity.
First, I developed a consumer micro-model with health and two goods, both of
which are positively correlated to the Consumer’s Utility. Health is the output of a
consumer’s production function with the two commodities as inputs. The first
commodity has a positive impact on health, while the second one has a negative
impact.
The result is that the elasticity of consumer health with respect to income,
referred to as Lifestyle Return to Scale and denoted by the parameter h is equal to
the algebraic sum of the health elasticity with respect to commodities. It may be
positive, negative or neutral. In opposition to health’s role as a normal good, as
reported by Wagstaff (1986), health can also be an inferior good in this model.
Second, I computed health multipliers. The impacts of a health shock on health
and income depend on labour share and are higher if the Lifestyle Return to Scale
is positive.
Third, the micro-behaviour function was introduced in the Solow growth model
in which the return to scale is constant. The most important results are that (1)
Lifestyle Return to Scale affects economic growth (the growth of income per
capita is higher than the technical progress if LRS is positive), and (2) health
improvement depends on the parameter LRS, h, it is lower than economic growth,
and it may be negative, even if economic growth is positive. In fact, the existence
of a health poverty trap in which economic growth diminishes health can be
demonstrated.
In conclusion, lifestyle is another aspect of society that governments can
attempt to control or regulate.For this reason, the Aristotelian concept of inter-
mediates is useful in the definition of virtue. In Nicomachean Ethics (Aristotle
2009), Aristotle explains that
drink or food which is above or below a certain amount destroys the health, while that
which is proportionate both produces and increases and preserves it (Nicomachean Ethics,
Book 2, Chap. 3).
32 G. Coppola
The absence of this notion of intermediate in individual behaviours negatively

affects society, and possible responses may be social exclusion and government
interventions in the private sphere, as condemned by Mill (1859), the intensities of
which may vary until an ethical Hegelian state is established.
Acknowledgements I would like to thank seminar participants at the University of Salerno and
the University of Pescara. I am grateful for many helpful comments, received during the course of
those presentations. Thanks also to Adalgiso Amendola, Alberto Bennardo, Dimitrios Christelis,
Floro Ernesto Caroleo, Marcello D’Amato, Sergio Destefanis, Fernanda Mazzotta, Niall O’Hi-
gghins, Carmen Pagliari and Giuliana Parodi for their very useful suggestions. The usual dis-
claimer applies.
A.1 Appendix
A.1.1 A Generalization of Wagstaff’s Model
Starting with Michael Grossman’s Model (1972) and Wagstaff (1986) developed a
one-period model of demand for health. The four hypotheses of the model include
the following: (1) an individual’s health is determined by the consumption of
health inputs hð xÞ ¼ xq ; (2) preferences are non-lexicographic: individuals desire
health but not above everything else; (3) individuals also consume other com-
modities that have a positive cost for consumers, so U ¼ uðh; zÞ with dU dU
dh ; dz [ 0
2 2
and d Udhðh;zÞ ; d Udzðh;zÞ \0; and (4) consumers have limited economic resources or
budget constraints: px x þ pz z ¼ Y; where px and pz are the prices of commodities
x and z, respectively, and Y is the income.
Assuming a Cobb Douglas Utility function and a Health production function
hð xÞ ¼ xq ; the Wagstaff Model can be formulated with the following formulas:
U ðh; zÞ ¼ ha zd ð2:32Þ
hð xÞ ¼ xq ð2:33Þ
p x x þ pz z ¼ Y ð2:34Þ
where 0\a\1 and 0\d\1 are the utility elasticities with respect to x and z,
respectively, and 0\q\1 is the elasticity of h with respect to x.
This is a special case of the Consumer’s model (Sect. 2) with b ¼ 0: The
commodity x is not in the Consumer’s utility function with ðc ¼ 0Þ; thus, z does
not affect health.
The solutions can be obtained from two different methods. The first was pro-
posed by Wagstaff:
max U ðh; zÞ ¼ ha zd s:t: px hq þ pz z ¼ Y ð2:35Þ

h;z
In this case the Budget Constraint is not linear. The consumer chooses between
health and z. The second possible solution is
max U ðx; zÞ ¼ xqa zd s:t: px x þ pz z ¼ Y ð2:36Þ

x;z
The consumer chooses the quantities of x and z that maximize utility.

Both methods yield the same solutions:
aq Y
x¼ ð2:37Þ
d þ aq px
d Y
z¼ ð2:38Þ
d þ aq pz
q
aq Y
h¼ ð2:39Þ
d þ aq px
The main differences include the following: (1) in the Wagstaff model, Health
can only be a normal good because dh dy [ 0 (conversely, in the model proposed in
this paper, Health may also be an inferior good), and (2) this result depends on the
lifestyle of the consumer.
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Chapter 3
A Comparative Analysis of Literacy
Rate in Contributing to Social
Exclusion Insights
Edgardo Bucciarelli, Carmen Pagliari, Fabrizio Muratore

and Iacopo Odoardi
Abstract Our contribution aims to analyze the relationship between the phe-
nomena of social exclusion and literacy levels, and to consider the significant
implication of this relationship on economic growth. The goal, which is reached by
analyzing cross-country data, is firstly to describe the situation of social exclusion
with the use of specific socio-economic variables, and secondly to compare the
levels of education and training for each considered country. These two phe-
nomena are mutually influenced, as a low level of literacy in affecting the
employment status precludes the possibility to enter and operate freely in society,
while poverty and persistent social exclusion of a person or family make difficult
to address appropriate educational and training paths. Therefore, our study has
rejoined two issues which influence almost all decisions adopted by policy makers,
especially in the Western world. The opening issue is the level of education, which
should constitute the human capital of a country, through appropriate investment,
and the second one is the relational condition of social dynamics, which highlight
the so-called social capital. Together these two types of intangible capitals con-
stitute a strong support for the long-term development of a country. Our quanti-
tative analysis is also addressed to detect differences and peculiarities among the
E. Bucciarelli (&) C. Pagliari

Università d’Annunzio di Chieti-Pescara, Pescara, Italy
e-mail: e.bucciarelli@unich.it
C. Pagliari
e-mail: c.pagliari@unich.it
F. Muratore I. Odoardi
Scuola Superiore, Università d’Annunzio di Chieti-Pescara, Pescara, Italy
e-mail: fabrizio.muratore@gmail.com
I. Odoardi
e-mail: iacopo.odoardi@alice.it
36 E. Bucciarelli et al.
different national realities, with the ultimate purpose to recognize which socio-
economic variables affect more directly the processes of education.
Keywords Social exclusion Literacy rate Education Human capital

Maximum likelihood Hierarchical cluster
JEL Codes C82 I21 O50 O57 Y10
3.1 Introduction and Related Literature
The level of education for an individual represents, especially in modern Western

societies, a potential effective indicator of the level of working capacity, the so-
called productivity, but also implies other less observable, but equally significant
skills. These are the essential knowledge for living in society as dynamic players,
without incurring the risk of being excluded from the traditional and contemporary
activities of society. But today there are many limitations to the normal training of
an individual, and in some cases, to the groups of disadvantaged people, for
example, the problem of poverty which affects the most vulnerable groups such as
the children, the elderly, and the ethnic minorities. Children living in families at
social risk or below the poverty line see foreclosed the best channels of education
and training, and find obstacles in the first years of their training school. This
situation could affect children’s subsequent paths of training and prevent them
from achieving adequate levels of education. For adequate levels of education we
mean the level of training which is considered optimal from the perspective of
each culture and society in order to access to stable employment as well as to
participate in society. However, if households living below the poverty line are the
most at risk, we must remember those with only one parent, those who live in
neighbourhoods with little social organization, and even those belonging to ethnic
or religious minority. Moreover, the strong positive correlation between illiteracy
and social exclusion is underlined by the wide set of definitions of literacy which
have been given over time. An example is provided by the General Conference of
UNESCO 1978 which provides several definitions of literacy. The first one states
that ‘‘[…] a person is literate who can with understanding both read and write a
short simple statement on his everyday life’’, while the second one is more
complex: ‘‘[…] a person is functionally literate who can engage in all those
activities in which literacy is required for effective functioning of his group and
community and also for enabling him to continue to use reading, writing and
calculation for his own and the community’s development’’. The two definitions
range from the simple ability of writing and reading to the reasoning skills of
adequately using the knowledge acquired. We are not referring merely to the
increasing of more cognitive abilities which allow to reach higher levels of
understanding, but also to the manner in which those who have these skills can
3 A Comparative Analysis of Literacy 37
exploit them to coexist in the stable and balanced society they belong to. This
particularly includes the definition offered by the International Adult Literacy
Survey (see Statistics Canada and OECD 2000): ‘‘The ability to understand and
employ printed information in daily activities, at home, at work and in the com-
munity—to achieve one’s goals, and to develop one’s knowledge and potential’’.
The definition used by OECD (2010) adds that ‘‘[…] differences in levels of
literacy matter both economically and socially: literacy affects, inter alia, labour
flexibility and quality, employment, training opportunities, income from work and
wider participation in civic society’’. Furthermore, the IALS Final Report (Sta-
tistics Canada and OECD 2000) shows a number of relationships about literacy:
countries with higher literacy scores have higher labour force participation and
shorter work hours whereas countries with a high proportion of adults with low
prose skills have lower GDP per capita. There is a correlation between a low GDP
per capita of a country and the rising proportion of adults with low prose skills.
Public intervention may partially cope and withstand the mentioned problems
related to the lack of literacy, by trying to obtain a plentiful and robust level of
national human capital in the long run. This is now a fundamental part of many
economic studies concerning growth and development. But the complex phenom-
enon of educating and training individuals cannot be regarded only as a general
educational teaching base of general educational foundations. This means not only
prepared trainers, and adequate public and private investment, but also a rational
project in order to develop in all individuals a sense of common rules through
education (see, for example, Grossman and Kim 1997). These are the foundations
for building a solid social capital which is itself a determinant of socio-economic
development processes (see, among others, Gradstein and Justman 2002, who have
also included the education processes in the relationship between social capital and
economic growth).
People who cannot reach satisfactory levels of literacy either by choice or
compulsion are the weakest in society and go toward the phenomenon of social
exclusion. The problems caused by poor literacy can be observed through two joint
events. The first one concerns the limited prospects of finding safeguarded
employment opportunities, the second one considers the defective contribution
which people offer to the socio-economic system through their labour productivity.
The difficulty in finding a job involves a certain separation from society. This
separation deprives individuals of their ability to fully exploit the possibilities
offered them by contemporary world. The individuals, though not in poverty, will
not have the opportunity to be engaged in specified conducts which are charac-
teristics of each society, as constitutional elements of general needs. Therefore,
this path is degenerative, and leads to conditions which are close to relative
poverty which tends to become a phenomenon that is passed between generations.
In fact, poor parents cannot guarantee the optimal education for their children (see,
among others, Grossmann 2008; Galor and Moav 2004), and socially excluded
parents represent a source of social exclusion for their children. The education
level of a person can be found either through the years of school attended, or
through the qualifications acquired. In particular, in this work, we observe the
influence which some typical variables, related to the processes of social exclu-
sion, can have on the average level of education of a country. It is known that the
economic conditions may affect the ability to achieve high average levels of
education, but also the strength of education and social capital constitute a lever of
development (see, among others, Temple and Johnson 1998). Gradstein and
Justman (2002) analyze the importance of a broad common cultural basis to start
those basic functions of effective interaction between individuals. The spread of
education, and, in general, of literacy may be a fundamental policy goal in trying
to establish virtuous processes from an economic standpoint. Essentially, the main
aim of our empirical study is to demonstrate how certain variables,1 which char-
acterize social exclusion, have obvious influences on the literacy rate. In order to
pursue this aim, we gather data concerning 30 countries and then we briefly
compare the effect of the above mentioned variables on the level of economic
development of the countries considered. In our particular case study, the literacy
rate represents the percentage of people with the ability to read and write without
specifying the level of education.
The framework of the paper is organized as follows. In Sect. 3.2, we start by
showing the methodology used. Then we proceed in Sect. 3.3 with a preliminary
empirical investigation on literacy rate, and on the expectancy variables.
In Sect. 3.4, the results of the multivariate regression model are presented. The
findings of the factor analysis with maximum likelihood method and VARIMAX
rotation are shown in Sect. 3.5. Furthermore, Sect. 3.6 focuses on multivari-
ate regression model for literacy rate with maximum likelihood components.
In Sect. 3.7, we represent and analyze the countries in a hierarchical cluster with
variables related to literacy. In Sect. 3.8 we focus our attention on specific
American literacy policies which are particularly significant for our study. We
present our conclusions in Sect. 3.9.
3.2 Methodology Applied for Empirical Analysis

on Literacy Rate for 30 World Countries
In this section we analyze literacy rate by using the least-squares method, the
factor analysis with maximum likelihood method and the hierarchical cluster. The
method of least squares is a standard approach to the approximate solution of over
determined systems (Moser 1996; Freund 2003), i.e. sets of equations in which
there are more equations than unknowns. Least squares means that the overall
solution minimizes the sum of the squares of the errors made in solving every
single equation. The most important application is in data fitting: the best fit in the
1
We have collected the cross-country dataset from UNESCO and World Bank. For the cross-
country analysis we provide, see also Levine and Renelt (1991, 1992); de Gregorio and
Lee (2002); Hoover and Perez (2004).
least-squares sense minimizes the sum of squared residuals, a residual being the
difference between an observed value and the value provided by a model (Björck
1996). We consider a linear regression model: hence, the model comprises a linear
combination of the parameters:
X
m
f ðxi ; bÞ ¼ bj /j ðxi Þ ð3:1Þ
j¼1
where the coefficient /j is functions of xi. Letting:
of ðxi ; bÞ
Xij ¼ ¼ /j ðxi Þ ð3:2Þ
obj
Then we can see in case (3.2) the least square estimate (or estimator, in the
context of a random sample), b is given by:
b ¼ ðX T XÞ1 X T y ð3:3Þ
Consequently, we consider the response variable as a linear function of the
regressors:
yt ¼ b0 þ b1 x1 þ þ bk xk þ et ð3:4Þ
In our paper, we analyze literacy rate (LR) as a function of school enrolment
consisting in pre-primary (PRE), primary (PRI), secondary (SEC) and tertiary
(TER); GDP real growth rate (GDP); long term unemployment rate (LUR); public
spending on education as percentage of GDP (PSE) and public spending on
education as percentage of government expenditure (PGE); children out of school
(COS). In our analysis, we consider different levels of education: pre-primary,
primary, secondary, and tertiary education. These levels are generally found in
similar ways in many countries, and generally go from kindergarten to the so
called higher education. The analysis regard 30 countries2 from different conti-
nents, and we consider mostly countries of Organizations for Economic Co-
operation and Development (OECD). The model we provide is the following:
LR ¼ b0 þ b1 PRE þ b2 PRI þ b3 SEC þ b4 TER þ b5 GDP þ b6 LUR þ b7 PSE

þ b8 PGE þ b9 COS ð3:5Þ
Therefore, in the next study we apply factor analysis in order to reduce the high
number of variables of model (3.5). Factor analysis is a statistical method used to
2
The countries considered by this research are: Australia, Austria, Belgium, Bulgaria, Canada,
Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,
Japan, Republic of Korea, Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway,
Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Turkey, United Kingdom, United
States.
describe variability among observed variables in terms of a potentially lower

number of unobserved variables called factors (Mardia and Kent 1980). In other
words, it is possible, for example, that variations in three or four observed variables
mainly reflect the variations in a single unobserved variable, or in a reduced number
of unobserved variables. Factor analysis searches for such joint variations in
response to unobserved latent variables. The observed variables are modeled as
linear combinations of the potential factors, plus an error term. The information
gained about the interdependencies between observed variables can be used later to
reduce the set of variables in a dataset. Factor analysis is related to principal
component analysis (PCA) but it is not identical, because PCA performs a variance-
maximizing rotation of the variable space and it takes into account all variability in
the variables. In contrast, factor analysis estimates how much of the variability is
due to common factors (communality). The two methods become essentially
equivalent when the error terms in the factor analysis model (the variability not
explained by common factors, see below) can assume the constant variance (Shore
and Sheppard 1996). In fact, PCA involves a mathematical procedure that trans-
forms a number of possibly correlated variables into a smaller number of uncor-
related variables called principal components. The first principal component
accounts for as much as possible of the variability in the data, and each succeeding
component accounts for as much as possible of the remaining variability. PCA is
mathematically defined as an orthogonal linear transformation that transforms the
data to a new coordinate system such that the greatest variance by any projection of
the data comes to lie on the first coordinate (called the first principal component),
the second greatest variance on the second coordinate, and so on. PCA is theo-
retically the optimum transform for given data in least square terms (Boersma and
Weenink 2001). For a data matrix, XT, with zero empirical mean (the empirical
mean of the distribution has been subtracted from the data set), where each row
represents a different repetition of the experiment, and each column gives the
results from a particular problem, the PCA transformation is given by:
Y T ¼ X T W ¼ VRT ð3:6Þ
where the matrix R is an m-by-n diagonal matrix with non-negative real numbers
on the diagonal and WRT V is the singular value decomposition (svd) of X. In our
analysis we tried to apply principal component analysis but we do not find good
results. Therefore we use maximum likelihood method with VARIMAX rotation
considering an extraction based on eigenvalue with eigenvalue greater than 0.5.
Indeed, in this kind of choice we find a good response of components. Before
trying this method, we analyze literacy rate also considering an extraction base on
eigenvalue greater than one but we discover a low result. In fact maximum like-
lihood estimation (MLE) is a popular statistical method used for fitting a statistical
model to data, and providing estimates for the model’s parameters (Besset 2001).
The method of maximum likelihood corresponds to many well-known estimation
methods in statistics. The sample mean is then the maximum likelihood estimator
of the population mean, and the sample variance is a close approximation to the
maximum likelihood estimator of the population variance. For a fixed set of data
and underlying probability model, the method of maximum likelihood selects

values of the model parameters which maximize the likelihood function. Maxi-
mum likelihood estimation gives a unified approach to estimation, which is well-
defined in the case of the normal distribution and many other problems.
In applying MLE we suppose that there is a sample x1, x2, …, xn of n inde-
pendent and identically distributed (i.i.d.) observations, coming from an unknown
distribution f0(). It is however known that the function f0 belongs to a certain
family of distributions ff ðjhÞ; h 2 Hg; called the parametric model, so that f0 ¼
f ðjh0 Þ: The value h0 is unknown and is referred to as the ‘‘true value’’ of the
parameter. It is desirable to find some ^
h (the estimator) which would be as close to
the true value h0 as possible. Both the observed variables xi and the parameter h
can be vectors. The variables xi may be non-i.i.d., in which case the formula below
for joint density will not separate into individual terms; however the general
principles would still apply. To use the method of maximum likelihood, one first
specifies the joint density function for all observations. For i.i.d. sample this joint
density function will be
f ðx1 ; x2 ; . . .; xn jhÞ ¼ f ðx1 jhÞ f ðx2 jhÞ f ðxn jhÞ ð3:7Þ
We may extend the domain of the density function so that the density is also a
function of the parameter h. Then, for a given sample of data with observed values
x1, x2, … xn, the extended density can be considered a function of the parameter h.
This extended density is the likelihood function of the parameter:
Y
n
Lðhjx1 ; . . .; xn Þ ¼ f ðx1 ; x2 ; . . .; xn jhÞ ¼ f ðxi jhÞ ð3:8Þ
i¼1
However, in general, the likelihood function is not a probability density. In fact,

it does not need to be an additive function, thus it is not a probability measure. In
practice it is often more convenient to work with the logarithm of the likelihood
function, ln L; called the log-likelihood, or its scaled version, called the average
log-likelihood:
Xn
1
ln Lðhjx1 ; . . .; xn Þ ¼ ln f ðxi jhÞ ‘^ ¼ ln L ð3:9Þ
i¼1
n
Indeed, ‘^ estimates the expected log-likelihood of a single observation in the

model. The method of maximum likelihood estimates h0 by finding a value of h
^
that maximizes ‘ðhjxÞ: This method of estimation is a maximum likelihood esti-
mator (MLE) of h0:
^ ^ 1 ; . . .xn Þ
hmle ¼ arg max ‘ðhjx ð3:10Þ
h2H
By applying maximum likelihood estimation, we can identify a point estimate

referred to each country considered in the analysis. Furthermore, for the appli-
cation of maximum likelihood we use VARIMAX rotation (Jakeman 2008). We
know that in quantitative methods a VARIMAX rotation is a change of coordinates
used in principal component analysis and factor analysis which maximizes the sum
of the variances of the squared loadings. That is, it seeks a basis that most eco-
nomically represents each individual, so that each country can be well described
by a linear combination of only a few basic functions:
0 !2 1
X k X P
c X k Xp
RVARIMAX ¼ arg max@ 4
ðKRÞij ðKRÞij A
2
ð3:11Þ
R
j¼1 i¼1
p j¼1 i¼1
where c ¼ 1 for VARIMAX. Variance maximizing rotation is often used in sur-

veys to see how groups of countries measure the same phenomenon. In our case
how the 30 countries considered distance themselves.
Ultimately, we use hierarchical clustering, which is a method of cluster analysis
which seeks to build a hierarchy of clusters. Strategies for hierarchical clustering
generally fall into two types, but we use only agglomerative method that is a
bottom up approach, in fact each observation starts in its own cluster, and pairs of
clusters are merged as one moves up the hierarchy. In general, the merges and
splits are determined in a greedy manner. The results of hierarchical clustering are
usually presented in a dendrogram. A measure of dissimilarity between sets of
observations is required in order to decide which clusters should be combined (for
agglomerative) (Székely and Rizzo 2005). In most methods of hierarchical clus-
tering, this is achieved by use of an appropriate metric (a measure of distance
between pairs of observations), and a linkage criteria which specifies the dissim-
ilarity of sets as a function of the pairwise distances of observations in the sets. We
chose Euclidean distance:
rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X
ka bk2 ¼ ðai bi Þ2 ð3:12Þ
i
We use the linkage criteria maximum or complete linkage clustering that

determines the distance between sets of observations as a function of the pairwise
distances between observations:
max fdða; bÞ : a 2 A; b 2 Bg ð3:13Þ
We apply the method of hierarchical cluster in order to identify any consistency
between the countries considered, and part of the same cluster as well as the
heterogeneity between clusters.
3.3 Preliminary Empirical Investigation on the Literacy

Rate and Expectancy Variables
The following analysis refers to the 30 countries some of which are OECD
members, over the period of time 2007–2009. The countries we chose to include in
our cross-country analysis are those that represent manifold and diversified
Table 3.1 Average, lowest and highest values for dependent and expectancy variables
Indicator Mean Lowest Highest
Literacy rate 98.25 88.70 (TR) 99.80 (LV)
GDP r.g.r. 0.003 -0.041 (LV) 0.045 (PL)
Pre-primary 0.891 0.159 (TR) 1.233 (ES)
Primary 1.058 0.549 (PT) 1.577 (ES)
Secondary 0.785 0.183 (NL) 1.479 (AU)
Tertiary 0.413 0.01 (NL) 0,968 (U.S.)
l.t.u.r. 1.760 0.045 (MX) 5.988 (SK)
p.e.p. GDP 0.051 0.019 (AT) 0.086 (JP)
p.e.p. GOV 0.132 0.034 (PT) 0.281 (LV)
c.o.s. 0.030 0.0002 (LU) 0.416 (U.S.)
Mean, maximum and minimum values for dependent and expectancy variables. In parentheses is
given the international symbol of the various countries
socio-economic contexts. However, the principal context studied is that of the

most advanced economies, which can be divided in numerous subgroups of
remarkable interest. Indeed, in the European case it is possible to observe the
substantial differences between the Scandinavian and the Mediterranean countries,
or the dissimilarities in the American States with Anglo-Saxon or Latin origin, in
theme of economy, education and society. In further investigations, we do not
exclude to consider and compare socio-economic contexts characterized by a very
dissimilar situation, like rich and poor countries, but it is essential to consider the
relevant problem of quality and updating of so numerous variables, as those used
in this paper. The first analysis performs the calculation of average values, lowest
and highest values reported for each considered variable. Variables that we ana-
lyze are: literacy rate,3 GDP real growth rate (GDP r.g.r.), pre-primary, primary,
secondary and tertiary schooling as percentage of total population by every
education levels of every country,4 long term unemployment rate (l.t.u.r.), public
spending as percentage of GDP (p.e.p. GDP) and public spending as percentage of
government expenditure (p.e.p. GOV), children out of school (c.o.s.) as percentage
of total children out of school. In the next page we show the results obtained from
descriptive analysis (Table 3.1).
Literacy rate has a mean value equal to 98.254%, this average is referred to the
30 countries considered in our analysis. The minimum is 88.7% and is represented
by Turkey (TR), the maximum value is represented by Latvia (LV) and is almost
100%. GDP real growth rate has its minimum value in Latvia, the same regards
other countries such as Hungary (HU) and Ireland (IE) which show negative
3
The literacy rate represents the percentage of people with the ability to read and write, and in
this case without specifying the level of education.
4
In our analysis we take into consideration different levels of education, such as pre-primary,
primary, secondary and tertiary education: these levels are generally found in similar ways in
many countries, and represent usually from pre-primary until the so called higher education
(tertiary).
values, while the highest refers to Poland (PL). The average GDP real growth rate
is near to zero, because in recent years there has been stagnation and recession of
the economy. The several education levels get the minimum value by Turkey,
Portugal (PT) and Netherlands (NL) in the four categories considered. Slovakia
(SK) shows the highest value reported for long unemployment rate. Furthermore,
Austria (AT) and Portugal are the countries with lowest usage rates of public
spending in education. Finally the variable related to children out of school shows
its maximum value in United States (US) and this percentage is always condi-
tioned by a high population abundance, and we note simultaneously a high degree
of school drop-outs. In the next section we begin the analysis of the literacy rate
applying multivariate regression method, maximum likelihood method and clus-
tering analysis to highlight the differences in education levels in recent years in the
countries considered.
3.4 Results from the Multivariate Regression Model
A first analysis of the variables related to education highlights a high variability in

the data due to different density of population of countries considered. For example,
United States has only in the pre-primary school more than 12 million of people,
whereas the U.S. population exceeds 300 million inhabitants in 2009 (U.S. Census
Bureau data). This indicates that data are based also on country’s population size.
The same is true for Mexico, Japan and France, which show a high abundance of
individuals enrolled in different educational levels. In contrast, countries which
show less members are represented by Iceland, Ireland, Latvia, Luxembourg and
Slovenia. This variability is also confirmed by symmetry and kurtosis indices
showing high amounts; this indicates an asymmetry of these distributions compared
to the normal one. We consider the parameter as normal when most of data are
distributed in average value, however in our results values are distributed more
even in areas of tail. Hence, literacy rate and children out of school reveal an
asymmetry of information, but it is only apparent as there are slight differences in
their percentages. Some countries have 99% of schooling, but many others are
below 90%. While long term unemployment rate, public spending and GDP real
growth rate report almost a normal distribution with low variability. By examining
interdependence between variables we notice strong groupings of countries in
relation to education levels and economic growth. Considering different levels of
education relate to each other, we note high direct relations. However, we note that
in most countries the literacy rate has percentages between 90 and 99% while the
long run unemployment rate shows a clear grouping of countries in the lowest
percentages of literacy rate. This indicates that with an increasing of the degree of
education levels the long-run unemployment rate decreases, as with a higher level
of education attained, individuals find more job opportunities.
Our aim here is to analyze literacy rate relationship with other variables pre-
sented in Sect. 3.3. For this purpose we use a multivariate regression analysis and the
mathematical model we propose is the (3.4), and in terms of variables is the (3.5).
Before applying the (3.5) we perform other types of investigations in order to
understand the influence of literacy rate compared to single macro groups5 under
analysis: we have first investigated literacy rate as a function only of education
variables, then literacy rate only with variables related to social exclusion.
Observing our results of statistical tests concerning the significance of the param-
eters and considering the best fitting to data, we choose to consider model as a
whole. Indeed, we use also education variables as percentages of total education in
different countries in order to identify the optimal model applied; resulting data are
not satisfactory for the significance of the parameters in any kind of linear combi-
nation we calculate. Thus, the combination of economic growth, education levels
and social exclusion variables leads to a better result than analytical models con-
sidered singly.
We analyze the presence of multicollinearity using the tolerance analysis that is
equal to:tol ¼ k R2 . When the values of this analysis are close to zero there is a
combination of other endogenous variables covered by our study. Moreover, we
use the variance inflation factor (VIF) that is the reciprocal of tolerance, in order
to achieve further confirmation of the result found with the tolerance analysis. The
VIF has a threshold value equal to 0.10 and we can check if there is collinearity
among independent variables considered. Tests for investigating endogeneity have
not been reported in this study since they have provided results in the standard and
not particularly interesting for our goals.
In addition, an important test we apply to detect the presence of autocorrelation
between independent variables is the Durbin-Watson statistics which is used in the
erratic component (et) of a regression analysis. The related formula is equal to:
PT
ðet et1 Þ2
d ¼ t¼2PT ð3:14Þ
2
t¼1 et
We are also interested in applying the heterogeneity test which concerns the
system of variables we have selected in order to describe the phenomenon of social
exclusion in terms of illiteracy as our data set is quite multifaceted (many vari-
ables, different from each other and variability between countries). For identifying
any heterogeneity we use the ANOVA test (analysis of variance), which locates
the dispersion of observed values compared with an expected value, so that we can
detect the possible homogeneity between the variables; the resulting variances
should be quite similar to each other otherwise it will confirm the hypothesis of
heterogeneity of the system. Finally, all the explanatory variables should be
uncorrelated with the residual terms (uncorrelated residual values), that is the
residue of an observation must be independent from the residual value resulted
from another observation. The results are shown in Tables 3.2 and 3.3.
5
For macro groups we mean groupings of the endogenous variables based on their similarities.
46
Table 3.2 Correlation index among explanatory variables

GDP r.g.r. Pre-primary Primary Secondary Tertiary l.t.u.r. p.e.p. GDP p.e.p. GOV c.o.s.
GDP r.g.r. 1 -0.094 0.119 0.138 0.004 0.132 -0.233 -0.057 -0.118
Pre-primary -0.094 1 -0.016 0.064 -0.160 -0.008 -0.125 0.068 -0.353
Primary 0.119 -0.016 1 0.023 -0.316 -0.152 -0.003 0.295 0.020
Secondary 0.138 0.064 0.023 1 0.124 -0.020 0.114 0.043 0.163
Tertiary 0.004 -0.160 -0.316 0.124 1 0.277 0.299 -0.310 0.491
l.t.u.r. 0.132 -0.008 -0.152 -0.020 0.277 1 -0.010 -0.294 -0.136
p.e.p. GDP -0.233 -0.125 -0.003 0.114 0.299 -0.010 1 -0.190 0.348
p.e.p. GOV -0.057 0.068 0.295 0.043 -0.310 -0.294 -0.190 1 0.052
c.o.s. -0.118 -0.353 0.020 0.163 0.491 -0.136 0.348 0.052 1
E. Bucciarelli et al.
Table 3.3 Univariate ANOVA

Sum of squares Df Mean square F Sig.
GDP r.g.r. b. g. 0.006 13 0.000 2.331 0.046
w. g. 0.004 19 0.000
Total 0.009 32
Pre-primary b. g. 0.960 13 0.074 2.859 0.019
w. g. 0.490 19 0.026
Total 1.450 32
Primary b. g. 0.731 13 0.056 6.079 0.000
w. g. 0.176 19 0.009
Total 0.906 32
Secondary b. g. 0.962 13 0.074 0.700 0.742
w. g. 2.009 19 0.106
Total 2.971 32
Tertiary b. g. 1.002 13 0.077 0.581 0.840
w. g. 2.521 19 0.133
Total 3.523 32
l.t.u.r. b. g. 18.158 13 1.397 0.623 0.807
w. g. 42.584 19 2.241
Total 60.743 32
p.e.p. GDP b. g. 0.003 13 0.000 0.848 0.612
w. g. 0.006 19 0.000
Total 0.009 32
p.e.p. GOV b. g. 0.061 13 0.005 2.021 0.079
w. g. 0.044 19 0.002
Total 0.105 32
c.o.s. b. g. 0.017 13 0.001 0.126 1.000
w. g. 0.197 19 0.010
Total 0.214 32
The acronym b.g. stands for between groups, while w.g. identifies within groups
First to apply the model, in Table 3.2 we report as preliminary analysis the
correlation index among the explanatory variables. This analysis helps us to find
the possible connections between variables and in almost all cases we find a weak
correlation between variables. In fact, the results are negative and positive but in
any way close to zero, and these values do not confirm concordances or discor-
dances for each variables, but a substantial indifference. We confirm in this first
analysis an independence between variables, since we note no specific connections
between them. We observe only a positive correlation relating to tertiary level of
education and children out of school (0.491), although this discordance is not so
strong to verify a relationship between them. Moreover, in Table 3.3, in order to
stress the possible heterogeneity between variables we calculate the analysis of
variance (ANOVA test) for all independent variables to get the significant values
comparing with a F (Fisher) test. In this case we note a significant result between
groups for GDP real growth rate, pre-primary and primary levels of schooling,
and public spending as percentage of GDP.
Table 3.4 Determination R R-square Adjusted Std. error of Durbin-Watson

index and Durbin-Watson test R square the estimate test
0.544 0.295 0.020 0.022 2.094
Furthermore, in Table 3.4 we note a low determination index which stands at

0.295 and this value does not give a normal adaptation for observed data and in
addition we report the value of Durbin-Watson test that is equal to 2.094. In this
case the test confirms the presence of no autocorrelation in the residuals.
In Table 3.5 we present the set of parameters resulting for each variable we
analyze and we show the standard error for each parameter. The results reveal that
most of coefficients are positive and so there is a direct relationship between the
type of endogenous variables and the literacy rate. This means that with
the increasing of students enrolled in pre-primary and primary levels of education
the level of literacy rate in each country grows more than exponentially. Para-
metric values obtained are small for those coefficients related to variables of social
exclusion. Finally, the significance of coefficients refers to pre-primary education
with a margin of error of 0.001. It can be seen as a significant and high parameter
obtained by the constant. And, further, in Table 3.5 we have the results of col-
linearity diagnostics and every tolerance values are higher than 0.5 for each
independent variable. These results confirm the presence of no multicollinearity in
our observed values. Therefore, this confirms that independent variables we
consider do not experience any kind of linear combination and do not show any
kind of influence between them (Table 3.6).
We observe that parameter estimates in secondary and tertiary education levels
tend to be equal to zero. Effectively in secondary level of school the value is
-0.005 and in tertiary level is -0.0003. Hence, in these two cases there are not
increases in the literacy rate, and so the dependent variable is constant during the
time for the latter two cases. The two parameter estimates do not confirm an
inverse relation because they are closer to zero, so it means that low percentage
from secondary and tertiary education levels have a constant effect on the literacy
rate. The lowest levels (pre-primary and primary) obtain a substantial growth in
the literacy rate. Consequently the literacy rate is most influenced by these pre-
vious categories (pre-primary and primary levels of schooling) because they
represent the most widespread activity of education. In fact, we refer to OECD
countries wherever these levels are reached by almost the entire population as
compulsory. In a dichotomic context, in which one is able or not to read and write,
to be literate or illiterate, the lowest levels of education have a greater influence on
the amount of literacy rate and therefore they are more representative of our
analysis. For example, imagine such a hypothetical backward economy, in which
there is only a low stock of physical capital, coeteris paribus: in this state of the
world it will be sufficient even the simplest investments to increase the stock of
capital (quantity rather than quality) in order to enable the first processes of
economic growth. Then the economy can move to investments with higher quality
in capital (e.g. ICTs) and/or in the labour component (e.g. human capital,
Table 3.5 Multivariate analysis of literacy rate and collinearity statistics

Model Coefficients Collinearity statistics
b Std. error t Tolerance VIF
Indicators Constant 95.560 3.653 26.160
GDP r.g.r. 20.932 24.391 0.858 0.836 1.197
Pre-primary 4.860 1.977 2.458 0.825 1.213
Primary 2.508 2.547 0.985 0.795 1.257
Secondary -0.005 0.070 -0.071 0.910 1.099
Tertiary -0.0003 0.001 -0.03 0.514 1.946
l.t.u.r. 0.072 0.311 0.231 0.794 1.259
p.e.p. GDP 15.315 25.631 0.598 0.762 1.312
p.e.p. GOV 8.806 7.698 1.144 0.754 1.327
c.o.s. 4.577 6.474 0.707 0.522 1.915
Table 3.6 Multivariate ANOVA of literacy rate

Model Sum of squares Df Mean square F Sig.
Regression 45.110 9 5.012 1.072 0.419
Residual 107.552 23 4.676
Total 152.662 32
knowledge-based economy, etc.) as well as in our study we find that the so-called
higher education affects other variables and has not a strong effects on the literacy
rate, such as productivity at work and the ability to produce innovations and,
overall, to promote a general economic development.
In general, the results concerning parameter estimates are not satisfying because
we do not find any significance with variables related to education or those linked
with social exclusion (except for the pre-primary level of schooling) and this
requires to gather only the most interesting information and sufficient to describe
the subject under analysis. So, these results lead us to apply other analysis, and in
particular we choose the factor analysis. Indeed, we note there is a redundancy of
information due to the presence of variables that are quite similar to each other:
e.g. in the case of education we have a number of variables available which
explain it and thus with factor analysis we try to represent the education with a
synthetic indicator. Consequently, as a first step we use the maximum likelihood
method. In the next section we report the findings.
3.5 Factor Analysis with Maximum Likelihood Method

and VARIMAX Rotation
In the following contents the factor analysis is carried out, and we apply the
maximum likelihood method in order to identify new components of the model
[see (3.10)]. Therefore, we use this method with VARIMAX rotation [see (3.11)]
Table 3.7 Initial and Indicator Initial Extraction

extraction values with
maximum likelihood method GDP r.g.r. 0.164 0.999
Pre-primary 0.175 0.379
Primary 0.205 0.238
Secondary 0.090 0.139
Tertiary 0.486 0.745
l.t.u.r. 0.206 0.269
p.e.p. GDP 0.238 0.206
p.e.p. GOV 0.246 0.338
c.o.s. 0.478 0.924
considering an extraction based on eigenvalue, with the latter greater than one. The
results are shown in Table 3.7.
In Table 3.7 we describe the initial and extraction of each variable according to
the maximum likelihood method. We note that initial value of each variable
increases with extraction. In particular, there is a good extraction in variable
referred to GDP real growth rate and children out of school. Once we calculate the
extraction we try to reduce variability of the phenomenon and eliminate an
unavailing information in the distribution with maximum likelihood method to try
to separate the meaning of the literacy rate from potential redundant relationships.
The set of findings is shown in Table 3.8.
In Table 3.8 we report initial eigenvalues, the extraction as sum of squares and
the rotation method we use: this method shows a normal dispersion of the vari-
ability of the phenomenon under study. We find four components which allow us
to explain almost 67% of the variability of literacy. Once we calculate eigenvalues
we report the results of the factor matrix.
In factor matrix (see Table 3.9) we show the importance of each component on
every endogenous variable analyzed. The first component explains in particular the
dynamics of GDP (GDP r.g.r.), while the second one relates to public spending of
GDP (p.e.p. GDP). The third is related to tertiary education level. The fourth
is related with pre-primary and secondary education levels. Then we apply
VARIMAX rotation and we obtain the results as shown in Table 3.10.
VARIMAX rotation (see Table 3.10) is similar to the results obtained
from factor matrix, but results of variables are different: in fact, the first compo-
nent is related to the long term unemployment rate (l.t.u.r) and the public
expenditure of GDP (p.e.p. GDP). While the second one concerns the GDP real
growth rate (GDP r.g.r.). The third is related to tertiary education level and the
fourth refers to the importance of education in pre-primary, secondary and tertiary
schooling. Finally, we calculate the factor transformation matrix. The results are
shown in Table 3.11.
In the factor transformation matrix (see Table 3.11) we report results of factor
matrix with VARIMAX rotation considering every principal component; thus, we
note a little change in the distribution of the phenomenon. Once we calculate the
Table 3.8 Initial eigenvalues, extraction sums of squared and rotation sums of squared
Factor Initial eigenvalues Extraction sums of squared Rotation sums of squared
loadings loadings
Total % of Cumulative Total % of Cumulative Total % of Cumulative
variance % variance % variance %
1 2.12 23.58 23.58 1.13 12.56 12.56 1.20 13.31 13.31
2 1.59 17.71 41.29 1.56 17.39 29.95 1.18 13.08 26.39
3 1.23 13.72 55.01 1.18 13.12 43.07 1.15 12.78 39.17
4 1.07 11.90 66.91 0.36 4.02 47.09 0.71 7.92 47.09
5 0.86 9.56 76.47
6 0.74 8.18 84.65
7 0.61 6.75 91.40
8 0.48 5.38 96.78
9 0.29 3.22 100.00
Table 3.9 Factor matrix Factor

Indicator 1 2 3 4
GDP r.g.r. 0.999 0.002 0.000 -0.004
Pre-primary -0.093 -0.381 0.048 0.472
Primary 0.119 -0.022 -0.473 0.016
Secondary 0.138 0.189 -0.006 0.291
Tertiary 0.003 0.596 0.619 0.083
l.t.u.r. 0.132 -0.063 0.492 -0.075
p.e.p. GDP -0.234 0.359 0.147 -0.033
p.e.p. GOV -0.057 -0.020 -0.543 0.200
c.o.s. -0.120 0.947 -0.118 0.004
Table 3.10 VARIMAX Factor

rotation
Indicator 1 2 3 4
GDP r.g.r. 0.064 0.976 0.047 0.200
Pre-primary -0.029 -0.093 -0.593 0.133
Primary -0.462 0.155 0.024 -0.018
Secondary -0.035 0.070 -0.016 0.364
Tertiary 0.608 -0.149 0.366 0.468
l.t.u.r. 0.504 0.109 -0.047 -0.026
p.e.p. GDP 0.140 -0.292 0.280 0.150
p.e.p. GOV -0.568 -0.035 -0.085 0.085
c.o.s. -0.112 -0.256 0.757 0.522
components with maximum likelihood method we apply multivariate regression

analysis using components resulting from factor analysis. In the next section we
report results of this new analysis.
Table 3.11 Factor Factor 1 2 3 4

trasformation matrix
1 0.064 0.977 0.046 0.199
2 0.013 -0.157 0.796 0.584
3 0.988 -0.078 -0.096 0.088
4 -0.137 -0.122 -0.595 0.782
Table 3.12 Determination R R square Adjusted Std. error Durbin-Watson

index and Durbin-Watson test R square of the estimate test
0.404 0.263 0.044 2.1356769 2.005
3.6 Multivariate Regression Model for Literacy Rate

with Maximum Likelihood Components
Factor analysis is helpful in order to use resulting components for regression

multivariate analysis of literacy rate. The first analysis is conducted considering
four components. The results are shown in Table 3.12.
In Table 3.12, we note a normal value for determination index, which is equal
to 0.263. We consider also that in this model we include all components extracted
by maximum likelihood method. We remark that Table 3.13 shows a significant
parameter only for components 1, 3 and 4 (the constant is also significant). The
value of Durbin-Watson test it is equal to 2.005. In this case the test confirms the
presence of no autocorrelation in residuals values. Also in Table 3.13 we have the
results of collinearity diagnostics and the tolerance values are in all cases inde-
pendent and higher than 0.5. This confirms the presence of no multicollinearity in
our values. The three components above mentioned have a significance for a
margin of error of less than 0.05. This result is satisfactory for our analysis,
because we are able to explain the dependence of literacy with only three vari-
ables. Consequently, we repeat multivariate regression analysis considering only
the above mentioned three components.
In Table 3.14, we show the value of determination index of the model. The
result is similar to that reported in the previous analysis, standing at 0.263 but it is
related to the use of only three components. In Table 3.15 parameters are sig-
nificant for all three components calculated with tolerance of less than 0.05.
Overall, we report a normal result of analysis, while these three components are
sufficient to explain the phenomenon of literacy rate. As a result we consider that
component 1 is a synthetic indicator of social exclusion of the countries consid-
ered, component 3 is an indicator regarding education level, while component 4 is
the economic factor represented by GDP real growth rate. The chart in Fig. 3.1
reassumes the values of literacy rate, expected and residual values concerning the
multivariate regression model.
Table 3.13 Multivariate regression model for literacy rate with maximum likelihood compo-
nents and collinearity statistics
b Std. error t Sig. Tolerance VIF
Constant 98.255 0.372 264.286 0.000
Regr. factor 1 -0.560 0.444 -1.261 0.218 0.990 1.011
Regr. factor 2 -0.023 0.384 -0.060 0.953 0.983 1.018
Regr. factor 3 -0.967 0.491 -1.970 0.059 0.815 1.226
Regr. factor 4 0.778 0.551 1.412 0.169 0.808 1.238
Table 3.14 Determination index and Durbin-Watson test

R R-square Adjusted R-square Std. error of the estimate Durbin-Watson test
0.404 0.263 0.077 2.0986646 2.005
Table 3.15 Multivariate regression model for literacy rate with maximum likelihood principal
components and collinearity statistics
B Std. error t Sig. Tolerance VIF
Constant 98.255 0.365 268.947 0.000
Regr. factor 1 -0.560 0.437 -1.283 0.210 0.990 1.011
Regr. factor 3 -0.964 0.480 -2.008 0.054 0.823 1.215
Regr. factor 4 0.774 0.537 1.441 0.160 0.820 1.219
Fig. 3.1 Literacy rate model

with observed, predicted and
residual values
In Fig. 3.1 expected values of literacy rate are very similar to observed data.
Determination index confirms a normal approximation of theoretical to real data.
Moreover, the success of the model is confirmed by residual values which tend to
zero and have very small variations, furthermore we note that residuals values are
also distributed randomly: this indicate a good result of analysis. Finally, on
horizontal axis we report international acronym of the countries: each value
belongs to literacy rate values. In the figure we note three countries having a
literacy rate lower than other countries considered, and we can see three light
spikes downwards due to smaller values. The three countries are: Mexico, Portugal
and Turkey. Once we identify the presence of a lower literacy rate for these
countries we perform a clustering to show differences between countries.
3.7 Hierarchical Cluster with Maximum Likelihood

Components for Literacy Rate
In this section we analyze literacy rate with regard to component 1 and 3 extracted
within the factor analysis by using maximum likelihood method. We consider a
hierarchical cluster applying an Euclidean distance and a complete linkage clus-
tering which are presented in methodology section as (3.12) and (3.13). By means
of the dendogram (not reported here) we find 3 important clusters. The results are
graphically described in Fig. 3.2.
Figure 3.2 shows that the cluster analysis is applied to components 1 and 3
which have been extracted by using maximum likelihood method. The first
component regards social exclusion variables such as long term unemployment
rate and children out of school, while the third component represents education
levels which consists in pre-primary, primary, secondary and tertiary schooling. It
is possible immediately to notice that the U.S. position is characterized also thanks
to their historic effort towards innovation and investments in human capital, and at
the same time they can keep good positions in the field of social exclusion. Most of
the countries concerned, almost all OECD, show similar levels of macro variable
related to education, and instead differ for social exclusion. This means that since
all countries with medium or high levels of income per capita always are able to
have good levels of enrollment and attendance at school, but not everyone can deal
effectively with social problems. In general, even if the theme of social exclusion
is extremely complex, and it is possible to observe it even with the use of other
variables, the countries on the left side of the figure reveal better results in this case
because they are affected by the recent past in which the macroeconomic results
have influenced some variables related, for example, to employment levels, which
are certainly among the main causes of exclusion. An additional cause for
exclusion taken by us into account is the rate of school non-attendance, it is
certainly, as fully demonstrated by the specific literature, a strong limit for inte-
gration, and often precludes the possibility, during adulthood, to reach adequate
Fig. 3.2 Hierarchical cluster

with maximum likelihood
components for literacy rate
levels of human capital: these are indispensable to achieve job and economic
security, especially in advanced and competitive socio-economic systems such as
those in analysis.
Figure 3.2 also shows a cluster consisting of a single country that is Slovakia.
This country presents a low literacy rate compared to other countries, and a low
level of education. A second cluster is composed by Mexico, Portugal, Turkey,
Greece, Belgium, Bulgary, Germany and Italy: these countries are located in two
different areas, because they are closer to other countries considered, but in the
same cluster because they have lower education levels than other countries, and
different kinds of social exclusion component. The third cluster is represented by
the greater part of countries, which report normal levels of education and social
exclusion. In particular, we note United States in the third cluster and placed on the
left-top of Fig. 3.2. It confirms a high level of consideration about the phenomenon
of literacy rate with respect to the other countries: we have the highest level of
education than other countries with a low degree of social exclusion.
Hence, policy implications should take account of these complex relationships,
and not only promote general literacy, but also support highest and specialized
levels of education and training, especially encouraging synergies between edu-
cation, social capital, and labor market. Indeed, in order to endorse the long-run
economic growth and development we cannot consider only the mentioned fun-
damental aspects of literacy which an advanced society must have. Even those
countries that today have low levels of social exclusion, as it has been calculated
by us, if they do not make continuous and future investments in human capital,
public and private, they will not enjoy advantages or benefits on globalized market
quotas or niches which can provide a strong support to the national economy. On
the other hand, contexts in which widespread education is more safe, because of
established public and private institutions, cannot ignore social issues and they
have to favor the so-called ‘‘social capital’’ of the entire population, as well as the
acquisition of civil behavioral rules in addition to education and training, and
especially to integrate the welfare of society in the necessary measures to take off
economic processes.
In conclusion, we can assert that literacy rate, considered as a factor of social
exclusion, can be certainly affected by the social exclusion variables here con-
sidered. This conditioning cannot occur early in the analysis, because of the het-
erogeneity of data has led us to different results. As a consequence, overall both
the results of multivariate regression model, and those related to maximum like-
lihood method and cluster analysis confirm an exclusion of Turkey, Mexico and
Portugal due to their relatively lower education than other countries involved in
the study. The condition of relative low education levels in to the last three
countries leads them on a multidimensional process of progressive social disrup-
tion. Ultimately, among the possible cases we explain in the next section the case
of the United States and main critical issues concerning Italy.
3.8 Policy Insights From Social Exclusion, Literacy

and Skillfulness: The Italian Criticalities
and the Case of the United States
After having described in the previous sections the relationship between the
phenomena of social exclusion and literacy levels, and having discussed both the
situation of social exclusion with the use of specific socio-economic variables, and
the levels of education and training with other variables for each considered
country, it is now important to focus our attention on the combination of literacy
policy and social exclusion.
Recently there has been a general trend in economic research to reckon that
any socio-economic problem can be blamed on poor literacy rates. If literacy
rates could be increased, then every country would be a more enlightened,
productive country. The theory is that if people are more skilled in reading,
writing, and other so called basic skills then that will allow workers to be more
productive. So that over the last decade, recommendations to increase literacy
and human capital have become more frequent, and now they are a constant of
the economic policy debate and beyond. In fact, our empirical evidences, as well
as those of numerous other studies leave no doubt. For example, in terms of
human capital stock, if we consider the rate of people holding a college degree,
Italy looks like a backward country and continues to move back towards the
more advanced countries. Recent studies conducted Statistics Canada and OECD
(2003, 2005) show that the proportion of graduates in Italy compared to the
population, even if increased from 9 to 14% between 1998 and 2008, has grown
less than the other countries considered. In 2008, the gap between Italy and other
countries has increased from 12 to 14% points in relation to the OECD average,
and from 10 to 11 in relation to the EU average. In policy terms, this means that
the discrepancy for the young Italian population is nowadays higher than for the
Table 3.16 Average literacy Literacy Numeracy

and numeracy scores of
16–65 year old, by country Country Score Country Score
(SC and OECD 2003) Norway 293 Norway 290
Canada 281 Canada 272
Switzerland 274 Switzerland 270
United States 269 United States 261
Italy 228 Italy 233
people aged 55–64 years. However, the average years of education are still
rather a vague measure of the total endowment of human capital. Even in light
of the foregoing, a most appropriate measure is based on the collection of
knowledge and skills of the population. Well, the proficiency of the Italian
population over the age of compulsory education is lower than the proficiency of
all countries collected in the latest survey edited by Statistic Canada and the
OECD in 2003 and entitled ‘‘International adult literacy and life skills survey’’.
This survey is an international comparative study conducted to provide partici-
pating countries with information about the skills of their adult populations. The
survey measures the literacy and numeracy skills of a representative sample of
16–65 year old from five participating countries (Canada, Italy, Norway, Swit-
zerland, and the United States). In this case, literacy is defined as the skills
which are necessary in order to understand and use information coming from a
text and other written formats. Numeracy refers to the skills required to manage
mathematical demands of diverse situations. In the OECD’s issue, prose literacy
and document literacy scores are combined into a single literacy score measured
on a scale from 0 to 500 points. Numeracy scores also range from 0 to 500; U.S.
adults have an average literacy score of 269 and a score of 261 in numeracy (see
Table 3.16). The United States outperform Italy in literacy and numeracy, but is
outperformed by Canada, Norway, and Switzerland in both skill areas.
According to this survey, the Italian adult population, taken as a whole, does
not have an appropriate functional literacy for the needs of an advanced country.
For example, approximately 80% of Italians aged between 16 and 65 have a
level of command on the mother tongue assessed substantially inadequate. In
comparison, in countries with higher skills (e.g. Norway), this quantity does not
exceed 30%, while it does not go beyond 50% in countries at intermediate
positions (such as Canada, United States, and Switzerland). If these data reflect
the relatively recent development of mass schooling in Italy, it seems that this is
not the only cause of the inappropriate functional literacy of Italian people. In
fact, the same OECD survey shows how in the age group between 16 and 25,
Italy reveals a gap with other countries which is only marginally lower than that
characterizing the group aged between 46 and 65. For younger generation, in the
four PISA surveys conducted by the OECD between 2000 and 2009 (OECD
2001, 2006, 2009), Italy has always shown a significant delay in the skills of the
15 year old students in each of the areas investigated.
If we compare PISA and other international surveys related to periods before

the school situation, it appears evident that this delay comes from a gradual
deterioration in the quality of the various school levels. The evidence is congruent
with the common perception of a good quality of the Italian primary schools, and
with a disappointing quality of the three years post elementary course. In effect,
the elementary school in Italy appears to be more effective in facilitating the
learning of reading and science, but not math, independently of the set of countries
taken as a reference. In the Italian secondary school, the results in science are
worse than the international average, and the outcomes in mathematics are much
worse. Therefore, investment in knowledge is needed, especially in Italy. But it
should also investigate into what and how to increase the skills which our society
will ever be in need of. In this regard, especially in Italy, the debate has been
ongoing for several years, and it involves the world of educational research, but
also that of socio-economic studies. For example, one can mention the project
‘‘Partnership for twentyfirst Century Skills’’, a joint initiative of the Federal
Government and some major U.S. companies, which is designed to act as a cat-
alyst to help plug the gap between what individuals learn at various levels of
education (education system) and what will be immediately useful to them in their
workplace. It will be fundamental to integrate the mastery of concepts related to
the traditional knowledge (languages, mathematics, science, economics, history,
geography, law, art) with the twenty-first century skills which contribute to social
inclusion: the practice of right thinking, the ability to solve problems, creativity,
the positive attitude towards innovations, the capacity to communicate effectively,
the openness to collaborate and work in teams.
Moreover, it is desirable to rethink the traditional relationship between
knowledge and know-how. For example, the overcoming of teaching methods
based on a substantial separation between the learning of knowledge and their
subsequent use in working life may require the introduction of significant changes
in school organization as well as in methods of teaching. However, the initial
situation of the Italian education system does not facilitate this change, because of
the dynamics of schooling attainments and employment contracts which make it
difficult to recruit new teachers trained in developing the twenty-first century
skills, and because of the scarcity of funds earmarked for school policies. Nev-
ertheless in Italy there is a need of training as well as of an effective system of
incentives and valid selection criteria which can differentiate and provide appro-
priate recognition of merit and preparation. Ultimately, the revitalization of the
Italian school system is a central theme of economic policy, and not just a matter
of public finance and/or a subject of sectoral issue because investment in literacy
and human capital goes beyond what is done in school-based educational pro-
cesses. In Italy, indeed, the formative and educational aspects of apprenticeship are
characterized by the gap between training activities arranged by the regions and
business reality. In fact, there is also no practice of certification of skills acquired
in the workplace. Therefore the Italian apprenticeship often becomes a mere
bargaining tool which reduces labour costs and makes the relationship between
employer and employee temporary. The difficulty to develop a real and effective
training programs in the system of firms also depends on the particular nature of
the Italian production system focused on small and micro enterprises. We must
understand that more and more investments in literacy and human capital are a
crucial asset to be cultivated throughout lifelong learning. This aim can be
achieved, especially in countries such as Italy, particularly through radical changes
in the educational provision.
The literature on poverty and social exclusion has paid much attention to
problems of local communities and this is highly compatible with the focus on area
in some of the exclusion literature centered on literacy. Social exclusion is of
increasing interest because it has gained a primary role in official documents and in
the political debate in Europe and, more recently, in Australia, Canada and the
United States. Hence, after having provided a conceptual foundation and having
given some guidance such as the application of the concepts suggested here, it is
now significant to highlight the public policy concerning this issue. Certainly
social exclusion has long been seen as a multi-dimensional concept, and we
consider central in the analysis we carried out to observe now the literacy policy in
the American case among the 30 countries here considered. We believe that
analyses of the social exclusion of American people, as well as other populations
in the world, already delve far beyond income into other areas such as education,
health, housing and social environment, including their overlaps with income
poverty. The U.S. is therefore already collecting and analyzing a great deal of data
on different aspects of social exclusion in which people and above all children
have the potential to be excluded and considering how these overlap with each
other. In fact, as we stated before, social exclusion has long been considered as a
multi-dimensional concept and we wonder whether this is good or a bad news for
the use of ‘exclusion’ in the U.S. socio-economic system, and we think that on the
one hand it is bad because one cannot look at social exclusion as something that
will drive completely new collection and analysis of data on various areas of
people’s lives, as it has arguably done in some European countries. On the other
hand it is good, as the data are there and there is much analysis on which to build.
Those signing-up to the ‘intellectual’ motivation for the use of ‘exclusion’ would
argue that the existing analyses and policies are no substitute for what could yet be
attained. Those subscribing only to the ‘political’ reason might argue that the
banning of exclusion would allow the existing work to penetrate yet further into
the policy world. If social exclusion is to gain ground as a concept in the U.S. then
those who seek to push it will have to think hard about the geographical definition
of the society from which people can be excluded, and how this relates to the level
at which anti-exclusion policy operates. In particular, we wonder if it is better to
persist with a national characterization of social exclusion and, for the insights of
our analysis, of school drop-outs. For example, as in some European countries,
large differences in state-level incidence of cash poverty among American people
result from switching from a national to a state-level poverty line, when defined in
conventional ‘European’ terms (Micklewright 2002). Scholars such as Rainwater
et al. (2001) show the effect of moving from a line of half the national median
income to one of half the state median. The average absolute difference in child
poverty rates is 4.1% points and the correlation between the two rates is 0.53. New
Jersey and Arkansas, the richest and poorest states respectively with median
incomes 25% above and 25% below the national figure, see their child poverty
rates rise from 14 to 22% (New Jersey) and fall from 26 to 14% (Arkansas).
Furthermore, there was a more than fourfold increase in permanent literacy and
education exclusions between 1990 and 1997. Primary school exclusions have
been rising faster from a low level, and sixty per cent of the excluded come from
unemployed homes. Those in care are more likely to be excluded as are those with
special needs literacy and education.
In particular, in order to evaluate U.S. literacy policy, and then to suggest a set
of guidelines to improve it, a reflection on how the meaning of literacy has
changed from the 1930s to nowadays is fundamental.6 In fact, the development of
literacy policy is affected by the way policy makers, employers, unions, and
government define literacy. It is important to note with Fingeret (1992) that
definitions of literacy share an emphasis on reading, writing, and, usually, computation
skills but differ in their descriptions of the extent of skills and the criteria for application.
For example, in one setting persons who can sign their name may be considered literate,
whereas in an another setting literacy is viewed as the ability to read a complex manual
and apply the information to a task (Fingeret 1992, p. 3).
The absence of a univocal definition of literacy as well as the fact that literacy is
a social construct is underlined both by studies aimed to identify parameters to
measure literacy performance and by researches focused on pedagogical issues.
From a pedagogical point of view, Gillespie Marilyn in Many literacies: modules
for training adult beginning readers and tutors (1990) gives evidence of the fact
that the programmes to fight illiteracy have to consider the fact that learners do not
share the same idea of literacy. From a statistical point of view, Bormouth in
Reading literacy: its definition and assessement (1974) underlines how the first
step to develop models for identifying performance criteria concerning literacy is
to analyze the concept of literacy for the purpose of identifying the parameters that
must be specified in literacy definitions. Following the study developed by Fing-
eret (1992), it is possible to identify four main views of literacy: (1) literacy as
skills which considers literacy as ‘‘a set of discrete skills that exist regardless of
context. This conception of literacy leads to focus on simple encoding and
decoding skills: sounding out words and studying lists of letter sounds, syllable
sounds, and words in isolation’’ (Fingeret 1992, p. 5); (2) literacy as tasks. This
notion described by Northcutt et al. (1975) underlines the ability to use skills
coming from literacy in order to cope with different tasks such as filling an
application form without taking into account the setting where the literacy task is
accomplished; (3) Literacy as social and cultural practices underlines the influ-
ence of the setting on succeeding in the literacy task; for example, filling an
application form for a checking account is a different task from sitting in a literacy
6
For a wider historical and social description of literacy in U.S. it is useful to consult Carl F
Kaestle et al. (1993).
class so that ‘‘the ability to do the task is considered stable across situations and
does not require only individual skill achievement’’ (Fingeret 1992, p. 6); and (4)
Literacy as critical reflection and action highlights the importance to take into
account both the ability to interpret the meaning of the written text as well as that
to elaborate critically the information coming from the text. This approach can be
represented by the works of Schwabacher (1989), Breen and Sobel (1991), and
Mc-Clellan-Cason et al. (1992).
The literacy policies have been influenced by these four different ways to define
literacy so that governments developed their programs to fight illiteracy by starting
from different conceptions of literacy. The historical survey A political review of
international literacy meetings in industrialized countries presented by Jean-Paul
Hautecoeur (1997) on the basis of the reports of 20 seminars and international
conferences linked to UNESCO gives evidence of how literacy policies changed
both in western Europe and north America from 1981 to 1994 without achieving a
general consensus. Concerning the aim of our paper, it is relevant to focus our
attention on the different literacy policies adopted by the USA government. On a
general level, it is possible to note that the concept of literacy and the following
literacy policy established by U.S. governments from 1930s to 1980s changed after
1991 when the National Literacy Act was signed by President George Bush. The
main characteristics of the period from 1930s to 1980s were represented by the
idea of literacy as skills and as tasks, by the close link between literacy goals and
economic achievement, and the lack of a strong central governmental coordination
of the literacy policies. Cook (1977) underlines that literacy is defined as the
simple ability to read and write a text by the U.S. Census Bereau in the 1930s and
1940s. Moreover,
from the outset in the 1960s, the enabling legislation for the federal literacy program
contained language supporting literacy development as a means toward other ends.
Conceived of as part of the larger war on poverty, literacy education was supposed to bring
about personal economic self-sufficiency as well as contribute to the eradication of poverty
in the United States (Fingeret 1992, p. 15).
The period from 1970s to 1980s puts the basis to the new tendency promoted by
the National Literacy Act. In fact, in the 1970s the Right to Read was strongly
asserted, and during 1980 s ‘‘several new organizations emerged to fulfill various
functions related to information dissemination, staff development, technical
assistance, research, and advocacy’’ (Fingeret 1992, p. 17) concerning literacy and,
at the same time, the Presidential Literacy Initiative was introduced. These social
and political events represent the background to the National Literacy Act which
was one of decisive steps toward implementing AMERICA 2000 strategy. The
National Literacy Act was significant because it ‘‘has the potential to change
the focus from a crisis orientation to a long-term commitment. The act establishes
the National Institute for Literacy, with relationship to the Departments of Edu-
cation, Labor, and Health and Human Services. The act also provides for creating
state or regional resource canters under the governor’s office rather than in the state
department of education. The National Literacy Act, provides the potential
leadership for a new infrastructure that addresses literacy education as an ongoing

responsibility of a coordinated set of institutions’’ (Fingeret 1992, pp. 16–17).
The National Literacy Act was a first decisive answer to the growing crisis of
illiteracy in America described by Jonathan Kozol in his work ‘‘Illiterate America’’
(1986) because it faced the problem by promoting both a long-term strategy and a
central coordination of the different regional and national efforts against illiteracy.
This policy was confirmed in 1998 by the Adult Education and Family Literacy
Act (AEFLA; Title II of the Workforce Investment Act) with provides States with
funding for a variety of services to help adults develop basic skills such as reading,
writing, math, English language competency, and problem solving.
After having shown the positive potential of the literacy policy introduced since
1990s, it is important to focus our attention on a consideration which can minimize
one of its possible negative potentials. Beder (1991) explains that ‘‘adult literacy
education is a tapestry of diversity’’ (p. 152). He makes reference to the fact that
learners come from different cultures and communities so that the central effort of
coordinating the different literacy programmes have to try to preserve this diversity
and not to promote cultural standardization.7 Hence it is important to involve the
community where the learners live in the literacy education. For example, the
National Illiteracy Action Project 2007–2011 promoted by the non-profit Talking
Page Literacy Organization aims to create Community Literacy Collaborations. In
fact, illiteracy is not only a school educational problem, but also a community
problem. From this point of view, it is important to develop a participatory cur-
riculum development process which takes into account and respects the cultures of
the learners (Auerbach 1989, 1990) as well as to promote scientific researches
which questions the interactions about teachers and learners as well as the nature
of literacy in families, communities, and workplaces.
3.9 Concluding Remarks
The aim of our study has been to examine how certain variables which charac-
terize the various processes of social exclusion have an impact on literacy rates in
terms of education in a large number of countries. According to social exclusion
theory, risks for illiteracy are positively associated with involuntary social, eco-
nomic, and cultural exclusion from society. In this paper, for analyzing the
complex phenomenon of social exclusion in terms of literacy a social exclusion
framework has been used in terms of children out of school, levels of education,
and exclusion from the labour market. The available literature on literacy related
to social exclusion has been reviewed to explore the available evidence on
7
This consideration is especially true for educational programmes defining literacy as critical
reflection and action because they can risk to develop a way of thinking based on the cultural
background of the teachers and not on the cultural affiliation of the learners.
associations among literacy, exclusion, and socio-economic outcomes. Starting

from the assumptions of many studies and researches, the paper addresses the
question of whether participation in education and labour programs reduces lit-
eracy inequities through promoting social inclusion. Equality of opportunity,
including educational and labour market exclusion is only partially open to
national policy interventions. It is also important how national education systems
offer opportunities of starting and continuing education. A more sophisticated
comparative research into this area is needed. Nevertheless it is known that the
complex phenomenon of social exclusion has a great influence on the economic
performance, and specifically on the socio-economic development of a country
through a variety of channels. We focus on the average education level of each
country considered. The education level and also the social capital are influenced
by several variables which can be traced by social exclusion itself. Certainly the
concepts of poverty and social exclusion are deeply interconnected. Therefore
when individuals or larger shares of population suffer because of socio-economic
conditions, such as widespread deprivation and unemployment, it is more difficult
to undertake and maintain optimal paths of education and training, and this could
foreclose the goal of creating an adequate level of human capital. This occurs more
in Western countries, where competition is high, and where human capital has a
crucial role in the dynamics of growth and development. On this regard, literacy
plays a crucial role in the construction of individuals’ ability to understand and use
reading, writing and numeracy skills, which provide the foundation for citizenship,
lifelong learning, work, and freedom in contemporary society. Literacy demand is
growing in number and complexity, and will continue to be a foundation for
citizenship, lifelong learning, work, and freedom in the future.
Moreover, the lack of an adequate literacy, related to the average level of each
social community, increases the risks of acquiring a protected working system, but
also the need to learn how to live civilly with others. In particular, literacy and
education are a foundation of a civil society which wants to grow permanently and
in the long run in terms of social, cultural, and economic prosperity. So that a
national policy should try to promote social inclusion through direct incentives for
the weaker groups of society. The variables which we consider for our cross-
country analysis cover the economic aspects of the school enrolment rates at
various levels, but also the public investments dedicated to education. We know
that conditions which hinder educational processes may result from economic
households difficulties, which in turn are often influenced by general economic
conditions, especially for people already at risk. It is also interesting to take into
account the number of students enrolled at various educational levels and the
economic outlook of households as indicators of widespread change in terms of
behaviour toward education. According to the findings of an initial analysis, we do
not verify a strong relationship between literacy and social exclusion: the basic
problem is due to the heterogeneity of the data related to the countries considered.
Factor analysis with maximum likelihood method has been useful to indentify
the main components in the estimate of literacy rate. It has been necessary to add a
variance maximum rotation to transform parts of the model. Finally, we identify
three components which can explain the overall dispersion of the phenomenon of
literacy rate: the first component (component No. 1 in the analysis) is a synthetic
indicator of social exclusion, the second one (component No. 3) is an indicator
regarding the education level, while the third component (component No. 4)
represents the economic factor identified by the GDP real growth rate. Then, we
have obtained a phenomenon composed of nine initial variables which have
become three unique variables. Finally, we group the 30 countries considered in
three key clusters which have naturally excluded those countries with education
and social differences from the other ones. Countries which mainly suffer social
exclusion conditions are Mexico, Turkey and Portugal due to their literacy rate
which is lower than that of the other countries. Ultimately, our analysis has served
to recognize the differences between countries in terms of literacy at the social
dimension. Indeed, we believe that social exclusion is one of the various causes of
literacy rate of a country. The empirical evidence has highlighted the heteroge-
neity of different countries, but we have also identified the presence of different
continental reality as the U.S. and some European countries which have strong
similarities regarding literacy aspects.
The future studies we intend to develop in this research field will consist on the
investigation of the relationship between literacy skills and the socio-economic
characteristics of individuals. For example, we intend to analyze the relationship
between parents’ education and skill of youth, how transmitted deprivation con-
ditions affect social exclusion dynamics, and if different age or linguistic groups
manifest different skill levels, and specifically if males and females perform dif-
ferently. Furthermore, it is our intention to study at what kinds of jobs people at
various literacy levels work and what wages they earn. Finally, we want to observe
what is the relationship between skills and the socio-economic characteristics of
nations, for example how new technologies affect skillfulness and general health.
In fact, it is possible to analyze the skills of the adult labour force which char-
acterize the growing areas of an economic system.
Acknowledgements The responsibility for the contents of this article lies entirely with the
authors and it should not be attributed to their affiliated institutions. The authors wish to thank
Giuliana Parodi, Dario Sciulli, Ainura Uzagalieva, two anonymous referees and the participants
at the XXV National Conference of Labour Economics, AIEL, Pescara (Italy), September 9–10,
2010 for suggestions, useful comments and the support received.
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Chapter 4
Education and Socioeconomic Mobility
in Post-Communist Countries
Alina Veraschagina
Abstract Patterns of intergenerational educational mobility are studied in twelve

post-communist countries of Central Europe and the former Soviet Union (FSU).
No clear trend in educational inheritance emerges over the recent 50 years,
covering both the period of socialism and transition to a market economy. If any,
we find the decrease in intergenerational persistence up until the generation of the
1950s. In subsequent years no further decline is observed. On the contrary in a
number of states the correlation between parents’ and children’s schooling got
stronger, further increasing over the period of transition.
Keywords Education Intergenerational mobility Post-communist countries

Eastern Europe Transition to a market economy
JEL Codes I24 D31 J62 P27
4.1 Introduction
Education is considered a strategic resource in a modern knowledge-based economy,

as well as the main prerequisite for socioeconomic mobility. Given so much emphasis
on increasing educational attainments, one would expect educational mobility1
1
Educational mobility is understood as a change in educational status across generations. It is
considered to be high if the highest level of education achieved by a child does not closely relate
to that of his/her parents. Educational persistence, by contrast, characterizes a situation where the
educational choices of children are affected by those of their parents.
A. Veraschagina (&)
Dipartimento di Economia e Diritto,
Università di Roma La Sapienza,
Rome, Italy
e-mail: alinaver@gmail.com
DOI: 10.1007/978-3-7908-2772-9_4, Ó Springer-Verlag Berlin Heidelberg 2012
68 A. Veraschagina
to be also on the rise. The available literature suggests this has not always been the
case (Hertz et al. 2007).
Assuming random distribution of talents between children, the development
and further use of these talents would require equal access to educational
resources, independently of the family background. High educational persistence
can thus be seen as an impediment to growth, whereby part of the available human
capital is not exploited fully.
This chapter investigates the trends in intergenerational educational mobility in
twelve post-communist economies2 in Central and Eastern Europe (CEE) and the
former Soviet Union (FSU) for which little empirical evidence has been made
available thus far. These countries witnessed a spectacular increase in educational
attainments during the socialist era fuelled by education offered free of charge. The
specific question that we ask is whether it had been accompanied by an increase in
educational mobility.
Some of the most recent studies, including Hertz et al. (2007) and
Pfeffer (2008), do not find considerable change in intergenerational educational
mobility over the twentieth century in a wide range of both developed and
developing countries, as if there are intrinsic forces keeping it relatively stable.
Pfeffer (ibid.) goes so far as to call educational mobility patterns and rates per-
vasive characteristics of nations. It would thus be important to understand whether
communist regimes managed to overcome this limit.
One of the factors that might hinder the increase of intergenerational education
mobility alongside the general rise of educational attainments is the tendency of
parents to provide their children with at least the same level of education as their
own.3 This holds true in any setting, be it capitalist or socialist economy. Parents’
involvement in the education careers of children takes different forms depending
on how the education system operates. In contexts where education is free, the
number of positions at higher levels is usually rationed. Thus higher-status parents
in socialist countries might have strived to facilitate entry into higher or higher
quality education for their offspring. Moreover, as long as the average educational
attainments increase, the share of parents who would favour educational persis-
tence would also increase.
The transition to market economy can be seen as another countervailing factor.
With the launch of market-oriented reforms and the concurrent near abolition of
free education, the role of the family background would gain importance and
educational mobility would decline as a result.
Testing these hypotheses is made difficult by the fact that investigation of the
communist period affords a long time-perspective but is limited by lack of data.
Conversely data are now available for the transition and post-reform periods,
2
These comprise Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
Slovakia, Slovenia, Romania, Russia and Ukraine.
3
Breen and Goldthorpe (1997) modeled this behavior within the framework of formal rational
action theory, despite the fact that the parents’ decision is often taken irrespective of the abilities
that the offspring shows.
4 Education and Socioeconomic Mobility in Post-Communist Countries 69
for which, however, the time span may still be too short to reconstruct a clear
trend. Different research methods have been proposed to overcome data limita-
tions, at least in part, and some empirical evidence on the intergenerational edu-
cational mobility in post-communist economies is already available.
In one of the first studies to appear, Ganzeboom and Nieuwbeerta (1999)
considered six Eastern European countries, including Bulgaria, Czech Republic,
Hungary, Poland, Slovakia and Russia. The authors concluded that the effect of
parents’ education decreased by about half from 1940 to 1985, but remained at the
high end of the spectrum in international comparisons.4 This would imply that the
socialist systems were unable fully to exploit the potential of education in order to
facilitate intergenerational mobility. Since then, a number of country-specific
studies have appeared (Beblo and Lauer 2004, for Poland; Gang 1996, and Varga
2006, for Hungary; Saar 2010, for Estonia; Hazans et al. 2008, for the Baltic
States), and practically all of them claim that parent’s education continues to have
a strong positive effect on children’s educational attainments in post-communist
economies.
Most of the studies nevertheless confirm that some increase in educational
mobility took place, especially in the post-World War II period. However, there is
no consensus as to its order of magnitude or how long the temporary improvement
lasted. There is even less consensus on the direction of the current trends or on
current levels of educational mobility, since both depend on how country-specific
institutions developed during the reforms. Several recent studies claim that
intergenerational educational mobility may have declined over transition, this
being the case for Bulgaria (Hertz et al. 2009) and Russia (Gerber and Hout 2004).
In what follows we shall re-consider these issues for a much larger number of
Eastern European countries than examined by any of the existing studies, and we
shall use the same methodology across the countries. Our specific focus is on three
hypotheses, respectively that (1) the relationship between education of parents and
their children weakened during the socialist era; (2) current levels of education
mobility in post-communist countries are higher than in their Western counter-
parts, and (3) transition to a market economy has caused an increase in educational
persistence.
We shall look at both pre- and post-reform periods. The divide between the two
is more marked for the FSU countries, where the launch of market-oriented
reforms coincided with the break-up of the Soviet Union. For other countries in
Eastern Europe, the timing of reform and the starting conditions varied. Some of
these countries had preserved elements of a market culture, and thus were better
prepared for the great transformation, while for others the transition came as a
shock after almost half a century of domination of socialist system. As a result, the
patterns of intergenerational educational mobility are also likely to vary among
4
The coefficients obtained by regressing the education of children against that of their parents
were at the level of 0.4–0.6 for Bulgaria, the Czech Republic, Hungary, Poland, and Slovakia.
Only for Russia were they found to be lower, 0.28 for men and 0.33 for women.
70 A. Veraschagina
transition countries, despite the fact that earlier they all adhered to socialist ideals
and currently all accept the market economy.
The chapter is structured as follows. In the next section we describe the data
and methodology used to approach the issue. We then present the results and
discuss the main findings. The final section makes some concluding remarks.
4.2 Data and Measures Used for the Analysis
We use education as a proxy for status in a society, and in order to trace its
transmission across generations, we look at how the education of parents and
children relate to each other. We rely on two basic measures for this purpose: the
coefficient obtained by regressing the years of education of an individual against
that of his (her) parents, and the correlation between the two levels of education.5
As emphasized in Hertz et al. (2007) these two measures yield different pieces of
information. The regression coefficient shows the change in the expected level of
education of children in response to a one-year change in the education of their
parents. The correlation coefficient measures the correspondence between one
standard deviation change in parents’ education and one standard deviation dif-
ference in the schooling of their children.6
Hertz et al. (2007) document a substantial decline in the regression coefficients
for a set of the 42 countries considered, which indicates a weakening of the
statistical association between the education of children and that of their parents,
not a weaker causal relation. However, the explanatory power of parents’ edu-
cation for the education of the next generation (R2 in the bivariate regression)
remains fairly stable, which is also reflected in the fact that the correlation coef-
ficient between the education of children and that of their parents is stable around a
value of 0.4. The study thus concludes that parental schooling by itself now
explains as much of the variance of children’s schooling as ever. This holds true
for some post-communist countries which had been investigated among others.
Given the distinctiveness of these countries with regard to education, it is worth
focusing on a larger number of them and asking more specific questions. This is
what we do in this chapter. The 12 ex-socialist countries that we consider are listed
in Table 4.1, which also reports the data source and the size of the sample used for
each country.
The sources of data include the European Social Survey (ESS) and the EU
Statistics on Income and Living Conditions (EU-SILC). For the countries covered
5
For this study we only use the information about the education of parents and their children, no
other regressors enter the specification. Note that our main focus is not on the causal relation, but
rather on association between the two main entries.
6
The relation between the two measures is as follows: rsc ¼ bcs ðrc0 =rc1 Þ; where the indexes c and s
stand for cohort and schooling, rc0 and rc1 are standard deviations of schooling in two successive
generation.
Table 4.1 Data used for the analysis

Country Year Dataset Number of observations usedc (out of total) Men/Women
Czech Republic 2005 EU-SILCa 5.751(8.628) 2.768/2.983
Estonia 2005 EU-SILC 5.570 (9.643) 2.593/2.977
Hungary 2005 EU-SILC 9.611(14.791) 4.570/5.041
Latvia 2005 EU-SILC 4.770 (7.913) 2.119/2.161
Lithuania 2005 EU-SILC 6.251(9.929) 2.825/3.426
Poland 2005 EU-SILC 23.699 (37.671) 11.223/12.476
Slovakia 2005 EU-SILC 8.394 (12.879) 3.966/4.428
Slovenia 2005 EU-SILC 5.356 (23.862) 2.612/2.744
Bulgaria 2006 ESSb 965 (1.400) 356/609
Romania 2006 ESS 1.389 (2.139) 656/733
Russia 2006 ESS 1.539 (2.437) 641/898
Ukraine 2006 ESS 1.352 (2.002) 532/826
Imposing age limits for the youngest and the oldest cohorts and dropping observations with
missing education implied a reduction in the size of the sample as shown in brackets (column 4)
a
The EU-SILC
b
ESS
c
The size of the samples is restricted by the number of observations with complete information
on own and parental education
by the EU-SILC, we use the years of education reported in the main survey, while
drawing information on the education of parents from the special 2005 module on
the intergenerational transmission of poverty. The module includes a question
about the highest level of education attained by the father and the mother. The ESS
provides similar type of information as the EU-SILC.
The education of parents in both of the surveys was reported in the form of the
highest level achieved. Levels of education were thus converted into years by
exploiting observations for which both years and level were reported individually
(see Tables 4.7–4.8 of the Appendix).
We first carried out the estimation on a year-by-year basis for all the countries.
Because the noisy picture obtained was not easy to interpret, and because the
results may have been influenced by unequal sizes of age-groups, we decided to
rely mainly on by-cohort estimates. The data were divided into nine 5 year birth
year cohorts as described in Table 4.2. Because the youngest and the oldest
respondents were excluded, the age interval of our observations spanned the ages
from 26 to 66 in EU-SILC, and 25 to 69 in ESS.
Table 4.3 reports the range in years of education for both the parents and
their children. Note that for most of the countries zero values are not allowed.
This depends on the classification used in the questionnaire, but should not be a
problem in a context where everybody is expected to obtain at least basic level of
education.7 Parent education is measured by the average value for the mother and
7
This was probably the motivation behind the coding for education, and it may have given rise
to an upward bias for older generations.
72
Table 4.2 Observations by countries and age cohorts

No Cohort Czech Republic Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia Bulgaria Romania Russia Ukraine
1 1935–1939 – – – – – – – – 108 98 141 180
2 1940–1944 777 696 1284 664 802 2078 826 598 132 177 116 126
3 1945–1949 792 642 1087 490 718 2752 932 575 128 166 177 156
4 1950–1954 803 741 1342 627 843 3605 1238 756 123 188 202 191
5 1955–1959 664 820 1295 681 1008 3698 1212 741 125 130 193 150
6 1960–1964 606 822 1019 658 993 3092 1190 690 91 131 175 129
7 1965–1969 628 708 1115 626 749 2692 904 683 99 191 189 144
8 1970–1974 715 608 1189 524 588 2771 935 640 84 182 183 134
9 1975–1979 766 533 1280 500 550 3011 1157 673 75 126 163 142
Total 5751 5570 9611 4770 6251 23699 8394 5356 965 1389 1539 1352
Source: Own calculations using EU-SILC 2005 and ESS 2006 as specified in Table 4.1
A. Veraschagina
Table 4.3 Years of education

Country Years of education Average years of education
Parents Children Parents Children
(min/max) (min/max)
Cohort 1 Cohort 9 Cohort 1 Cohort 9
Czech Republic 4/15 4/15 8.9 10.2 10.1 10.8
Estonia 2/15 2/15 6.0 11.5 10.5 10.9
Hungary 2/15 2/15 6.0 10.0 9.2 10.7
Latvia 2/15 2/15 6.1 10.4 9.1 10.0
Lithuania 2/15 4/15 4.0 10.9 10.1 11.5
Poland 2/15 2/15 4.1 8.7 7.9 11.0
Slovakia 4/15 4/15 7.1 10.3 10.3 11.1
Slovenia 2/15 2/15 5.1 8.4 8.1 10.6
Bulgaria 3/16 1/22 6.8 10.4 10.6 11.9
Romania 2/18 0/25 4.7 10.7 7.9 12.7
Russia 4/18 3/22 6.2 12.4 10.9 13.7
Ukraine 3/17 0/25 5.7 12.1 10.3 12.5
Source: Own calculations using data as specified in Table 4.1
the father. When the information is missing for either parent, the remaining value
is treated as the average value for the couple in order to maximize the number of
observations.
All of the datasets involved in this study lack information on children who live
outside the household. At the same time, parent education is reported by children
independently of whether they lived in or out of the household, or whether they
were still alive or not. Whilst this ensures wider coverage, recollection by children
may be problematic.
Table 4.3 also reports average years of education for the first and the ninth
cohorts, with separate records for parents and children. The figures for children are
often twice as high as those for parents, providing evidence of a considerable
increase in educational attainments in the countries under consideration in the
second half of the twentieth century.
4.3 Empirical Findings
We first estimated the two basic measures of educational persistence as described

in the previous section. For the six countries in common with the study of
Ganzeboom and Nieuwbeerta (1999), the values obtained for the correlation and
regression coefficients were broadly comparable, with the sole exception of
Bulgaria. For this country we found much higher educational persistence, as can be
seen from Table 4.4. Our findings are probably driven by the sharp decline in
74 A. Veraschagina
Table 4.4 The relation between parents’ and children’s education

Country All Men Women
Correl. Coeff. Correl. Coeff. Correl. Coeff.
Czech Republic 0.380 0.519 0.386 0.532 0.383 0.523
Estonia 0.331 0.308 0.339 0.299 0.335 0.316
Hungary 0.461 0.419 0.434 0.375 0.487 0.460
Latvia 0.389 0.448 0.395 0.448 0.390 0.444
Lithuania 0.358 0.292 0.337 0.272 0.387 0.314
Poland 0.391 0.409 0.385 0.389 0.398 0.426
Slovakia 0.329 0.335 0.304 0.303 0.353 0.366
Slovenia 0.402 0.458 0.335 0.355 0.463 0.554
Bulgaria 0.626 0.665 0.614 0.618 0.629 0.689
Romania 0.508 0.557 0.466 0.538 0.562 0.605
Russia 0.402 0.336 0.368 0.313 0.438 0.369
Ukraine 0.312 0.309 0.326 0.356 0.291 0.295
Source: Own calculations using the data as specified in Table 4.1
intergenerational mobility in post-socialist Bulgaria also documented in Hertz

et al. (2009).8
Overall, no clear pattern emerges for the trend in educational inheritance over
the past 50 years (see Fig. 4.1), which is contrary to the expectations raised by
Ganzeboom and Nieuwbeerta (1999). If anything, we find a decrease of inter-
generational persistence until the generation of the 1950s. In later years there
appears to be no further decline, on the contrary, in a number of states the effect of
family background grows stronger. In all likelihood, the earlier decline is the
outcome of the policy of massively expanding education implemented by practi-
cally all governments of the Eastern Bloc in the first half of the twentieth century.
The graphs in Fig. 4.1 also highlight the between-countries differences in the
levels of educational mobility. The Central European countries oscillate around
values of 0.3–0.5 for correlation and regression coefficients, while former mem-
bers of the Soviet Union tend to record lower values, around 0.2–0.49: this is
specifically the case of Lithuania, Russia and Ukraine (see Table 4.4 for average
values of correlation and regression coefficients across cohorts).
The recent trends are of particular interest for testing the effect of transition on
intergenerational mobility. This is a feasible task with the data at hand, since both
EU-SILC 2005 and ESS 2006 include people born in the 1970s, who are expected
to have completed their education career in the mid 2000s, be it at secondary or
8
The correlation between the education of parents and that of their children in Bulgaria almost
doubled from 1995 to 2000. Moreover, educational attainments declined in absolute terms for
children from families with lower levels of parents’ education. Hertz et al. (2009) claim that this
was an economically-driven structural change caused by the contraction of public spending on
education and the decline in its quality, the increase in out-of-pocket costs, the fall in the number
of schools, and the rise in unemployment among those with secondary education.
9
Some overlapping between the two groups is possible within the limits of the confidence
intervals, although it is not consistent throughout the years considered.
Czech Republic Estonia

1 1
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
coefficient correlation coefficient correlation
0 0
1942 1947 1952 1957 1962 1967 1972 1977 1942 1947 1952 1957 1962 1967 1972 1977
Hungary Lithuania
1 1
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0 0
1942 1947 1952 1957 1962 1967 1972 1977 1942 1947 1952 1957 1962 1967 1972 1977
Latvia Poland
1 1
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0 0
1942 1947 1952 1957 1962 1967 1972 1977 1942 1947 1952 1957 1962 1967 1972 1977
Fig. 4.1 Intergenerational educational regression coefficients and correlations. Source: Own
calculations using the data as specified in Table 4.1
higher levels. Most importantly, the sample includes also people who obtained
their degrees during transition and whose educational choices may have been
affected by the ongoing changes.
In order to test the effect of the transition we had to identify the timing of the
possible structural break in the data. This task was not straightforward, since the
reform was launched at different points in time and at different paces throughout
Eastern Europe. Graphical evidence about the time pattern of the estimated coeffi-
cients (Fig. 4.1) is not particularly suggestive, since no isolated and major break
emerges clearly over the period considered. We therefore decided to test for all
possible breaks in the data by using first the CUSUM test and then the Chow test.
The CUSUM test is based on the cumulated sum of residuals (Brown
et al. 1975) and verifies the occurrence of structural breaks without prior knowl-
edge of the precise timing of the breaks. The test is performed by plotting the
cumulated sum of residuals against time as in Fig. 4.4 of the Appendix. The
structural break occurs if the CUSUM plot falls outside the predefined boundaries.
76 A. Veraschagina
Slovenia 1
Slovakia
1
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0 0
1942 1947 1952 1957 1962 1967 1972 1977 1942 1947 1952 1957 1962 1967 1972 1977
Romania
1
Bulgaria 1
0.8
0.8
0.6 0.6
0.4 0.4
0.2 0.2
0 0
1937 1942 1947 1952 1957 1962 1967 1972 1977 1937 1942 1947 1952 1957 1962 1967 1972 1977
Russia Ukraine
1 1
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
coefficient correlation correlation coefficient
0 0
1937 1942 1947 1952 1957 1962 1967 1972 1977 1937 1942 1947 1952 1957 1962 1967 1972 1977
Fig. 4.1 (continued)
When the plot gets close to the boundaries, it is generally interpreted as a sign of
possible model instability in that period. In our case it refers to the instability of
the regression coefficient bt, i.e. the coefficient of parents’ education, our only
regressor for the years of education of children.
CUSUM squared is a complementary version of the CUSUM recursive resid-
uals. It is based on the cumulated sum of squared residuals. The two tests are
complementary in the sense that CUSUM squared is more appropriate to test for
haphazard rather than systematic changes in regression coefficients.
We performed the CUSUM test on the whole time series of matched (average
years of) education of children and their parents, starting from the generation of
the late 1930s—early 1940s and ending with the generation of the late 1970s.
This procedure thus enabled us to identify all the possible breaks in the data
over the 40 year period considered and not only those caused by the transition.
Table 4.5 The incidence of structural breaks

Country Structural breaks in the data detected by Confirmed by
the Chow test
CUSUM CUSUM squared
Czech No break Instability 1962–1970 1967 (1%)
Republic
Estonia 1969–1970 1960–1962, 1968–1970 1960(1%), 1968 (5%)
Hungary 1967 No break No break
Latvia 1973 1958–1959, 1972–1973 1958 (1%), 1972 (1%)
Lithuania 1965 1954–1955, 1962–1963 1954 (1%), 1963 (1%)
Poland 1967–68 1956–1957, 1963 1956 (1%), 1963 (1%)
Slovakia No break Instability 1958–1963 1958 (5%)
Slovenia Instability No break 1962(1%)
1962–1966
Bulgaria Instability 1961, 1977, instability 1961 (10%), 1977
1977–1982 1960–1980 (5%)
Romania 1980 1960, instability 1960–1968 1960 (1%)
Russia Instability Instability 1966–1970 1954 (1%)
1954–1957
Ukraine No break Instability around 1945 1945 (1%)
Note: Here we refer to the year of birth of a child
Source: Own calculations
As exemplified in Fig. 4.4, the main change in fact occurred around the beginning
of the 1960s (note that birth years are displayed by the figure). Table 4.5 in turn
lists the detected years of instability or of structural breaks.
Once break years had been identified through the CUSUM tests, the statistical
significance of the related findings could be ascertained using the Chow test (see
column 4 in Table 4.5). In the majority of cases the Chow test confirmed the
occurrence of breaks as detected by the CUSUM squared. Note that, sometimes,
significance (at the conventional 5% level) was achieved by the CUSUM squared
plot, but not by the CUSUM of the recursive residuals. According to Brown
et al. (1975), in such cases instability is due to change in the residual variance
rather than to shifts in the values of the regression coefficients. Moreover, the
timing of detected breaks as in Table 4.5 suggests that, although transition gen-
erated some instability in the patterns of intergenerational transmission of edu-
cation, there had probably been prior events that brought about major changes.10
The search for possible explanations for the trends identified in the data cannot
ignore the historical context. We have already found that educational persistence
started to increase after a short period of post-World War II improvement. In that
period, the Cold War escalated and was epitomized by the construction of the Berlin
Wall. Fear and uncertainly about the future were characteristic features of that time,
leaving imprints on everyday life. In such a climate, people might have become more
self-oriented and less prone to share equally resources, at least with regard to education.
10
Recall that the most important transformations caused by the economic transition in Eastern
Europe took place in the late 1980s to early 1990s (Roland 2000).
78 A. Veraschagina
There may be other reasons for more self-oriented behavior. One of them is
self-protection, as in the case of the young males in the Soviet Union who entered
higher education also to avoid army service at the time of the war in Afghanistan.
The war began in 1979 and continued for a long nine-year period during which it
never stopped being a threat for youths who feared being sent to the war zone. The
generation of the early 1960s that was about to enter university at the turn of the
1970s was affected the most. For many parents, higher education became a way
to shelter their sons, since entering college allowed postponement of military
service.11 Clearly, the sons of influential parents could resort to this option more
easily, which tended to reinforce educational persistence. This specific factor may
help explain why educational mobility started to decline in the FSU, and why sons
attracted more investment in education than daughters. But it does not rule out the
more general explanations that will be explored in the next section.
To summarize our findings thus far, of the three hypotheses that we tested, the first
two were partially rejected, while the third was weakly confirmed. Specifically, our
expectations of a weakening in educational persistence during the communist era did
not receive full support from the data. The initial decline during the post-World War
II period was followed by a setback some 10 years before transition started.12
We also expected to find higher mobility, i.e. lower regression and correlation
coefficients, in post-communist versus mature market economies, but this too was
only partly supported by the data. Among the countries considered, only Lithuania,
Russia and Ukraine came close to the 0.2 mark at some point (Fig. 4.1). The
remaining countries consistently displayed middle range values. This has been also
found to hold for market economies by other studies employing the same method-
ology (Hertz et al. 2007). Our final expectation concerned the effect of transition on
educational mobility, and the data suggest that this further declined during the
economic reforms. The next section offers some evidence in support of these
findings.
4.4 Discussion
In the light of the fact that so much effort was devoted by communist countries to
promoting socioeconomic mobility, and that education was the main road to
mobility, the overall outcome was modest: only the generations between the late
11
After World War II and until 1984, which covers the first five years of the war in Afghanistan,
college students were exempted from military service. Because of the lack of soldiers, this
privilege was abolished in 1984 for all the universities but the very best [http://www.allpravo.ru/
library/doc6934p0/instrum6935/print6943.html]. The status quo was restored in 1989, the year in
which the war in Afghanistan ended.
12
Note, here we refer to the year when a person acquired the highest level of education, while
previous tables and graphs referred to the year of birth. We assume that the distance between
these two moments is of the range of 17–20 years.
Fig. 4.2 Low (left panel) versus high (right panel) mobility cases
1930s and the 1950s were apparently able to take advantage of temporary
increases in educational mobility.
Overall, the case of post-communist economies raises the question of whether
high educational mobility is sustainable over time. If we abstract from the eco-
nomic and political context shared by the countries of Eastern Europe at that time,
and which may in itself counter social mobility, what other factors may have
worked against high educational mobility?
The issue of sustainability is explored in Fig. 4.2 by means of a scattergram of
the paired values of parent and child education in two hypothetical cases of
mobility, respectively low (left panel) and high (right panel). High mobility is
characterized by a greater dispersion of values, with at least two implications.
First, the fact that average educational attainment increases may lead to a decrease
in educational mobility because of lower dispersion. Put simply, when everybody
is highly educated, there is little room for improvement.13 Second, high mobility
also includes cases of downward mobility whereby highly educated parents fail to
ensure transmission of high educational levels to their children. The latter cir-
cumstance is not easy to accept for parents, all the more so when the number of
children per family decreases.
As argued by Hirsh back in 1976, education is a partly positional good in the sense
that its value depends on both absolute and relative values consumed. In his view, the
relative quantity and quality of education matters for access to the limited number of
high status positions to which individuals may aspire. When education is made
available to everybody for free, it loses the meaning of the main feature of socio-
economic status. By contrast, the privatization of education sphere is expected to
strengthen competition for a positional good (Adnett and Davies 2002).
13
Note that in the extreme case where everybody holds the highest degree, mobility would go
down to zero. While this is not realistic, it makes the point about the effect of an overall increase
in education levels and the kind of contraction in the gap between the education of children and
their parents evidenced in Table 4.3.
80 A. Veraschagina
Fig. 4.3 Returns to
.7
BG
education and educational
persistence. Source: Own
calculations
Educational persistence
.6
RO
HU
.5
PLLT
CZ
.4
EE
RU
LV UA
SK
.3 SI
5 6 7 8 9 10
Returns to education
In order for investment in education not to be discouraged, it is important that

the educated labour force should be able to find jobs where the skills previously
acquired are adequately exploited and remunerated.14 Providing everybody with
equal opportunities to get education and/or increasing the average educational
level is therefore a necessary but not sufficient condition to sustain educational
mobility. On the labour supply side, moreover, the more education is freely
available, the longer the investment period may become before conspicuous
returns are reaped, which implies longer postponement of working life. This
amounts to an increase in the opportunity cost of education, especially for children
from disadvantaged families, and it may therefore contribute to slowing down
educational mobility. A decrease in educational mobility that originated on the
supply side may have been reinforced by the reduction in PRE on the demand side
of the labour market. The latter was probably accentuated by the deterioration of
the economic situation which prompted the reforms.
Direct evidence on pre-transition PRE is scanty. One exception is the study on
Romania by Andren et al. (2004), which provides an estimate of returns to edu-
cation during the 50 year period from 1950 to 2000. According to this study, an
initial increase in PRE (see Table 4.3, ibidem), lasted until the 1960s and was
followed by a decline until the early 1990s. This is consistent with the pattern of
educational mobility that characterizes Romania, where educational persistence
rose from the late 1950s onwards (see Fig. 4.1).
Note that (PRE) are expected to have different effects on intergenerational
income mobility (IIM) and educational mobility (IEM):
14
An educated labour force is a luxury that not every country can afford in large numbers. In an
open economy, people can always migrate in search of higher returns to their education. Unless a
country pursues well-designed education and migration policies, increasing human capital may
turn into a loss. In former planned economies migration was limited, as well known, and the full
effect of higher education was felt within the country.
PRE # ¼ [ IIM " ð4:1Þ
PRE # ¼ [ IEM # ð4:2Þ

The first expectation is widely supported by estimated earnings functions,15 while
Fig. 4.3,16,17 provides evidence that the second expectation may also hold for tran-
sition countries. The figure illustrates how increasing PRE are pushing mobility up,
and vice versa.18 The latter case is often referred to as an incentive trap, the logic
behind it being that low returns to education create little incentive for children with
poor backgrounds to spend their effort on schooling.
Because of this incentive trap, there may have been a substitution effect
following the decrease in PRE (that we have hypothesized to occur before the
transition) whereby people started to attribute more importance to income than to
education as a way to obtain higher social status.19 An indirect evidence on the
same effect can be drawn from a study by Titma et al. (2003), where fathers’
education was found to play modest role for achieving higher societal status
shortly before the collapse of the USSR.
A very important implication is that education in post-communist countries is
increasingly becoming an investment good while in the past it was partly treated as
consumption good.20 Change in this respect especially affects the new generations,
those exposed to a market culture for which schooling is increasingly driven by
economic calculus.21 This may further reinforce the relation between PRE and
15
IIM will be higher in a given generation if there are lower returns to human capital for
children or if children’s human capital is less sensitive to parental earnings (see e.g. Solon 2004;
Blanden et al. 2005). To show that, assume that earnings are a function of human capital in a
given generataion (Wt = /tHt+ut). It is also plausible to assume that children’s human capital
accumulation relates to parental income (Ht = utWt-1+vt). Thus we can obtain the following
intergenerational mobility function: Wt = /t utWt-1+xt, where xt = /t vt +ut.Then the
intergenerational income mobility expressed by the join parameter /t ut will be higher if
there are lower returns to human capital for children (captured by /t), or if children’s human
capital is less sensitive to parental earnings (lower ut).
16
Note: We use returns to education as reported in Table 4.6. They were deliberately selected
for the mid 1990s and are expected to affect the education choices of the youngest cohorts.
Mobility in turn is measured as an average of the correlation coefficients between the education of
children born in the 1970s and the education of their parents.
17
For a set of countries considered, returns to education explain about one third of the variation
in educational persistence.
18
Because of the few countries considered, the revealed positive relationship between PRE and
IEM may not be particularly indicative. This effect was actually found to be weak in a recent
study by Chevalier et al. (2009).
19
Education is one of the main determinants of earnings, yet it explains only about one third of
the variation in earnings (Bowles et al. 2001).
20
Studying, studying and studying, Lenin’s famous slogan was a form of life guide instilled in
the minds of people from early childhood. Education was perceived primarily as a means to
achieve a comprehensively developed personality (Pastuovic 1993).
21
This explains a shift in interest to specialties not particularly in demand under central
planning, with finance, economics and law leading the list.
82 A. Veraschagina
Table 4.6 Selected findings on returns to education in transition countries

Country Author Data source Year PRE
Czech Republic Flabbi et al. (2008) ISSP 1996 7
Estonia Hazans (2003) LFS 2000 7.9
Hungary Flabbi et al. (2008) ISSP 1996 8.2
Latvia Hazans (2003) LFS 2000 6.7
Lithuania Hazans (2003) LFS 2000 7.1
Poland Flabbi et al. (2008) ISSP 1996 7
Slovakia Flabbi et al. (2008) ISSP 1998 6.6
Slovenia Flabbi et al. (2008) ISSP 1997 10
Bulgaria Flabbi et al. (2008) ISSP 1997 5.3
Romania Andren et al. (2004) IHS 1996 6.7
Russia Flabbi et al. (2008) ISSP 1997 7
Ukraine Brainerd (2000) HS 1994 9.7
PRE–private returns to education. BHSIE–Belarusian Household Survey of Income and
Expenditure, ISSP–International Social Survey Programme, LFS—Labour Force Survey, IHS—
Integrated household Survey, HS—Household Survey
educational mobility. If the state is unable to sustain PRE at reasonably high levels,
the potential of education as a channel of socioeconomic mobility will be weakened.
Table 4.6 reports the PRE values used to construct Fig. 4.3. The values have
been drawn from different studies and might not be fully comparable, but their
levels are apparently as high as PRE in other European countries (for a survey see
Psacharopoulos and Patrinos 2004).
It is interesting to compare the levels of PRE with the measures of intergen-
erational educational mobility reported in Sect. 4.4. Across countries, higher PRE
associate with higher educational mobility, as also shown in Fig. 4.3. For each
country, however, high returns to education in later stages of the transition often go
together with middle-to-high and yet decreasing educational mobility (see
Fig. 4.1). One explanation for these apparently contradictory findings is that
transition reversed the relationship between PRE and IEM. An alternative expla-
nation, which we favour, is that estimated PRE do not fully capture actual returns
before and during the transition.
Estimates of returns to education available in the literature on former
planned economies have been derived by applying the standard approach
developed for market economies. How appropriate is this approach to esti-
mating PRE in the pre-reform period? The main problem, as we shall see, is
that in socialist countries the overall ‘pay’ packet included important non-
monetary components. The latter are disregarded by the standard estimation
approach, thus causing underestimation. For example, the elites often enjoyed
free access to health services or housing, the latter alone could reduce
household expenditures by about one third. The demise of planned economies
ended this redistribution in-kind in favour of the elites. With the liberalization
of wage setting, monetary returns to education are likely to increase because
the pressure towards equality of (monetary) income ceases and the best
educated receive comparatively higher wages. However, if this is accompanied
by the loss of in-kind benefits, then overall returns to education may not
increase. Thus, estimates of PRE before or during the transition period must
be treated with caution, especially for countries where in-kind benefits
were large.
An additional shortcoming of many existing estimates of PRE for countries in
transition is that they fail to account for the fact that the private cost of education
generally rises with the progressive expansion of the market. If this were instead
taken into account, the likelihood of decreasing rather than increasing returns
during transition would definitely be higher.
There is still no consensus in the literature on this matter (for a recent survey
see Flabbi et al. 2008; Brunello et al. 2010). But the indirect evidence, including
the decreasing intergenerational educational mobility found by this study, rein-
forces the idea that PRE may have not increased during transition.
4.5 Conclusion
The expectations that educational persistence might have decreased substantially

during the socialist era are not entirely supported by this study. We find that an
increase in educational mobility until the generation of the 1950–1960s was fol-
lowed by a decline. We also find that economic transition cannot be held
responsible for the mobility decline, since much of it generally took place some
10 years before the reform was launched. More than one reason can be cited as to
why this had happened.
The first reason, which we may call ‘intrinsic’, is that high levels of inter-
generational educational mobility are inherently difficult to sustain. High mobility
necessarily entails some downward mobility, whereas parents generally tend to
oppose the latter, because they do not accept the prospect of having children with
lower education than their own.
Other reasons are specific to socialist countries. Since the latter were initially
able substantially to increase educational levels for all at low cost, education lost
the meaning of the main attribute of socioeconomic status in the central years of
socialism, which in turn discouraged investment in education. This was particu-
larly the case of children from disadvantaged families, for whom the opportunity
cost of working at earlier age was a crucial factor. The higher the average edu-
cational level, the longer it is necessary to invest in schooling in order to gain a
comparative advantage. Thus further improvement increasingly became the priv-
ilege of children from well-off families.
In addition, the Soviet system pursued egalitarian policies featuring compressed
earnings scales, which lowered the returns to education. As a result, the idealistic
pursuit of education as a consumption good lost its attraction and people began to
84 A. Veraschagina
view it as an investment good. If education does not pay enough, why invest in it?
Widespread disincentives started to roll educational mobility back.
The deterioration in the economic situation that preceded the transition to a
market economy was the result of persistent inefficiencies inherent to a central-
planned economic system (Roland 2000). This reinforced the downward pressure
on wages exerted by the egalitarian ideology, and it is likely to have further
reduced PRE. In the pre-reform period, in fact, further lowering of PRE and the
contraction of mobility rates may have sustained each other.
The challenge is to explain what happened after the demise of socialism during
transition to a market economy. According to some of the first studies PRE
increased during the early transition period (see e.g. Newell and Reilly 1999;
Münich et al. 2005), while further developments are not so clear. The most recent
studies suggest that the evidence of a rising trend in PRE during late transition is
rather weak (Flabbi et al. 2008; Brunello et al. 2010).
Our own findings are that intergenerational mobility declined, and this evidence
may be taken to imply that the relationship between private returns and educa-
tional mobility reversed during transition. However, there are reasons to doubt that
such a reversal took place. This is because the estimated increase in PRE in
transition countries may have been exaggerated on two counts: because many of
the benefits were in-kind under socialism and are not included in available esti-
mates, and because the latter also ignore the rise in the costs of schooling after
transition. Further research is thus needed to account fully for changes in returns to
education and educational mobility during this period. Whatever answer is given
to the last question, the future prospects of intergenerational educational mobility
will hinge critically on each country’s ability to ensure adequate levels of actual
returns to education via the labour market.
Acknowledgements I am grateful to Sam Bowles and Tom Hertz firstly for getting me involved
into this field of research and then providing guidance. Special thanks go to Francesca Bettio for
careful supervision of this work which made part of the Doctoral thesis. I also wish to thank the
participants of the IX GDN conference, the XXV AIEL conference and the BEROC seminar for
useful comments, in particular, Tom Coupe, Randall Filer, Francesco Pastore and Maksim
Yemelyanau, and the two anonymous referees for suggestions that allowed improving the
chapter. All possible imperfections remain my own responsibility.
A.1 Appendix
See Tables 4.7–4.8.

See Fig. 4.4.
Table 4.7 EU-SILC 2005, education coding
Highest education level achieved Czech Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia
Republic
Nobs Years Nobs Years Nobs Years Nobs Years Nobs Years Nobs Years Nobs Years Nobs Years
Pre-primary education – – 18 2 61 2 35 2 – – 139 2 – – 21 2
Primary education or first stage 16 4 67 4 185 4 629 4 142 4 3954 4 9 4 1077 4
of basic education
Lower secondary or second stage 579 8 661 8 2429 8 176 8 645 8 1 8 658 8 163 8
of basic education
(Upper) secondary education 4317 10 2745 10 5462 10 2426 10 2117 10 15175 10 6244 10 3061 10
Post-secondary non-tertiary education 90 12 579 12 34 12 565 12 1847 12 875 12 – – 348 12
First and second stage of tertiary 749 15 1500 15 1436 15 929 15 1480 15 3520 15 1471 15 652 15
education*
Missing – – 4 10 20 35 12 34
Total 5751 5570 9611 4770 6251 23699 8394 5356
*Corresponds to ISCED values 5 (not leading directly to an advanced research qualification) and 6 (leading to an advanced research qualification)
4 Education and Socioeconomic Mobility in Post-Communist Countries
Source: Own elaboration on the basis of EU-SILC 2005

85
86 A. Veraschagina
Table 4.8 ESS 2006, education coding

Highest education level achieved Nobs Years
Bulgaria
Not completed primary education 10 3
Primary education 29 4
Lower secondary education 199 8
Upper secondary 478 11
Post secondary, non-tertiary education 66 14
Tertiary education 182 16
Total 965 –
Romania
No school 21 0
Primary school 106 4
General school, lower secondary 221 8
Vocational and apprenticeship 341 11
High school (upper secondary) 372 12
Post-high school 131 15
University degree 161 17
Post-graduate degree 8 18
Total 1389 –
Russia
Primary of first stage of basic education 40 4
Lower secondary, second stage of basic 132 8
Upper secondary 401 11
Post secondary, non-tertiary 515 13
First stage of tertiary 427 15
Second stage of tertiary 24 18
Total 1539 –
Ukraine
Not completed primary education 5 3
Primary education 51 7
Not completed secondary education 70 8
Completed secondary education 370 10
Secondary technical education 515 13
First stage of high education 41 15
Completed high education (specialist, master, post-graduate, scientific degree) 306 17
Total 1358 –
Source: Own elaboration on the basis of ESS 2006
Czech Republic
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1942 1979 1942 1979

year year
Estonia
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1942 1979 1942 1979

year year
Hungary
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1942 1979 1942 1979

year year
CUSUM latvia CUSUM squared

CUSUM squared
1
CUSUM
0 0
1942 1979 1942 1979

year year
Fig. 4.4 Graphical illustration of the CUSUM test

88 A. Veraschagina
Lithuania
CUSUM CUSUM squared
CUSUM squared
CUSUM
1
0 0
1942 year 1979 1942 year 1979
Poland
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1942 year 1979 1942 year 1979
CUSUM Slovakia CUSUM squared

CUSUM squared
1
CUSUM
0 0
1942 year 1979 1942 year 1979
CUSUM Slovenia CUSUM squared

CUSUM squared
1
CUSUM
0 0
1942 year 1979 1942 year 1979

Bulgania
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1940 year 1987 1940 year 1987
Romania
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1940 year 1987 1940 year 1987
Russia
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1940 year 1981 1940 year 1981
Ukraine
CUSUM CUSUM squared
CUSUM squared
1
CUSUM
0 0
1940 year 1981 1940 year 1981

90 A. Veraschagina
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Chapter 5
Analysing Industrial Accidents
in European Countries Using
Data Envelopment Analysis
Eugenia Nissi and Agnese Rapposelli
Abstract There has been increasing interest in improving working conditions and
in reducing occupational accidents and diseases in the European Union. This paper
examines the performance of fifteen European countries, in respect of this issue, in
three economic sectors—manufacturing, construction and distribution trades—by
means of the non-parametric approach to efficiency measurement, represented by
Data Envelopment Analysis (DEA). A linear programming framework is therefore
used to construct a production frontier which allows measurement of relative
efficiency among national institutions in the sample considered.
Keywords Occupational safety and health Accidents at work Technical

efficiency Data envelopment analysis Undesirable outputs
JEL Codes J28 J81 L60 L74 L81 C61
5.1 Introduction
Safety and health at work is now one of the most important and most highly
developed aspects of the European Union’s policy on employment and social
affairs. Nowadays, the development and implementation of holistic approaches
E. Nissi (&) A. Rapposelli

Università d’Annunzio di Chieti-Pescara, Chieti, Pescara, Italy
e-mail: nissi@dmqte.unich.it
A. Rapposelli
e-mail: a.rapposelli@unich.it
94 E. Nissi and A. Rapposelli
and strategies towards occupational safety and health (OSH) becomes more and
more important to further improve the working conditions in the EU Member
States.
For the European Union, in fact, the improvement of working conditions and
the prevention of workplace accidents are amongst the primary objectives to
pursue, as stipulated in the Treaty of Rome (Article 136) and confirmed by the
Framework Directive 89/391. Again at the Lisbon European Council in March
2000, the objective that the European Union set itself was ‘‘creating more and
better jobs’’ (Commission of the European Communities 2002).
However, according to Eurostat data, 5,720 people die each year due to injuries
at work and 3.2% of employees suffered at least one injury. An accident at work is
defined as an external, sudden, unexpected, unintended and violent event during
the execution of work or arising out of it, which causes damage to the health or
loss of life of the employee. For qualification as an accident at work to apply, there
must be a causal relationship (direct or indirect relationship of cause and effect)
between the violent event and the work. There are many methods of preventing or
reducing industrial accidents, including anticipation of problems by risk assess-
ment, safety training, control banding, personal protective equipment, respiratory
equipment, safety guards, mechanisms on machinery, safety barriers, etcetera.
The current Community strategy aims to achieve a 25% cut in accidents at work
across the EU by 2012. A key concept and fundamental pillar for reaching the
objectives of this Community strategy is the development and implementation of
coherent national strategies in the EU member states.
Occupational safety and health policy is not only a matter of laws and
regulations. In order to achieve measurable improvements of working conditions
and a reduction of occupational accidents and diseases it is necessary to combine
them with a variety of other instruments, such as social dialogue, good practices,
awareness raising, corporate social responsibility, economic incentives and
mainstreaming. Hence, the performance of national institutions needs to be eval-
uated in terms of their ability to maximise macroeconomic objectives while
minimising accidents at work. So there is an increasing need for tools that allow
proper measurement of the performance of organizations in respect to this issue.
In this context, the aim of the present paper is to measure the technical effi-
ciency of fifteen European countries for the year 2005 in respect to the number of
workplace accident in three economy sectors—manufacturing, construction and
distribution trades. To this purpose, the efficiency analysis is conducted by using
the non-parametric approach to efficiency measurement, represented by Data
Envelopment Analysis (DEA). Except for a few studies (Beriha et al. 2010;
El-Mashaleh et al. 2009; Qu et al. 2010), efficiency analysis using DEA method
have not been conducted frequently in this field.
However, while in traditional DEA models we have two categories of factors
(inputs and outputs), now we consider a third kind of factor, an undesirable output,
represented by the number of accidents at work, that could be generated from the
production process.
5 Analysing Industrial Accidents in European Countries 95
Ordinary efficiency measures are not suitable in contexts where at least one of
the variables that have to be radially contracted or expanded is not a ‘‘good’’. In
the standard DEA models, decreases in outputs are not allowed and only inputs
are allowed to decrease (similarly, increases in inputs are not allowed and only
outputs are allowed to increase). Hence, our objective is to adapt the DEA
technique to the problem at hand, where outputs do not refer only to ‘‘goods’’,
but we have also ‘‘undesirable’’ outputs. To effect the rankings, we therefore
implement a new model of DEA, where undesirable and desirable outputs will
be treated differently.
The paper is organized as follows. Section 5.2 reviews the theoretical
background about technical efficiency and DEA method, Sect. 5.3 presents the
data used and lists the results obtained and Sect. 5.4 gives the conclusions.
5.2 Data Envelopment Analysis Methodology
The term efficiency is widely used in economics and refers to the best use of
resources in production. Modern efficiency measurement began with Farrell
(1957), who drew upon the work of Debreu (1951) and Koopmans (1951) and
introduced a measure for technical efficiency. According to them, technical effi-
ciency is producing the maximum amount of output from a given amount of input,
or alternatively producing a given output with minimum quantities of inputs.
Farrell suggested measuring the efficiency of a firm in terms of distance to the
best unit on the production frontier, that is represented by the production function
of the efficient units. The efficiency frontier is unknown, and it must be estimated
from sample data. Drawing inspiration from his argument, two approaches were
developed for estimating the efficiency of organisational units: a non-parametric
one represented by Data Envelopment Analysis (DEA) and a parametric one
represented by Stochastic Frontier Analysis (SFA). The units under evaluation are
also called Decision Making Units (DMUs). DMUs are homogeneous organisa-
tional units: they perform the same function, by using the same types of resources
to produce the same kinds of goods or services. Each DMUs represents an
observed correspondence of multiple input–output levels.
Data Envelopment Analysis is a non-parametric method for assessing the rel-
ative efficiency of Decision Making Units. Rather than explicitly stating the
functional form of the best practice frontier, DEA measures efficiency relative to a
deterministic frontier using linear programming techniques to envelop observed
input/output vectors as tightly as possible. The basic DEA models measure the
technical efficiency of a DMU in terms of the maximal radial contraction to its
input levels (input orientation) or expansion to its output levels feasible under
efficient operation (output orientation).
The first DEA model, proposed by Charnes et al. (1978) and known as CCR,
assumes the DMUs to be assessed to operate within a technology where efficient
production is characterised by constant returns to scale (CRS). Under input
orientation the relative efficiency of a DMU j0 is obtained from the following

linear model:
e0 ¼ min h0
subject to
X
n
h0 xij0 kj xij 0; i ¼ 1; . . .; m ð5:1Þ
j¼1
X
n
kj yrj yrj0 ; r ¼ 1; . . .; s ð5:2Þ
j¼1
kj 0; 8j ð5:3Þ
where yrj is the amount of the rth output to DMU j, xij is the amount of the ith input
to DMU j, kj are the weights of DMU j and h0 is the shrinkage factor for DMU j0.
The linear programming problem must be solved n times, once for each unit in the
sample, for obtaining a value of h for each DMU. The value of h0 obtained is
termed the technical input efficiency of DMU j0 and it is bounded between 0 and 1:
a technical efficient unit, according to Farrell (1957) definition, will have a score of
unity, while inefficient ones will have a score less than unity.
The technical efficiency of DMU j0 can be also determined under output
expansion orientation, whose objective is to maximise outputs while using no
more than the observed amount of any input. Due to the CRS assumption, the
relative efficiency score h0 of the output-orientated model relates to that of the
input-orientated model via e0 ¼ 1=h0 .
Subsequent papers have considered alternative sets of assumptions, such as
Banker et al. (1984), who modified the basic CCR model to permit the assessment
of the productive efficiency of DMUs where efficient production is characterised
by variable returns to scale (VRS). The VRS model, known as BCC, differs from
the basic CCR model only in that it includes in the previous formulation the
convexity constraint:
X
n
kj ¼ 1 ð5:4Þ
i¼1
The presence of the convexity constraint in the BCC model reduces the feasible
region for DMUs, which, in general, results in an increase of efficient units;
otherwise CRS and VRS models work in the same way. In general, under the VRS
assumption the model orientation (input or output) affects the projection point on
the frontier and the resulting efficiencies may not be the same. Thus, for inefficient
DMUs we may have e0 6¼ 1=h0 , although the subset of efficient DMUs is the same
irrespective of model orientation.
However, although this method has been extensively applied to many areas of
economics as an instrument of efficiency measurement, few authors have used it to
take into account undesirable outputs. It was mentioned already in the seminal
work of Koopmans (1951) that the production process may also generate unde-
sirable outputs. Undesirable outputs are prominent in the ecological context
(‘‘environmental harmful effects’’ or ‘‘harms’’, Thore and Freire 2002), such as
pollution emissions generated in air or in water, waste, poisonous metals dumped
into the soil, but they may as well appear in non-ecological applications (Smith
1990) including health care (complications of medical operations) and business
(tax payments).
As mentioned earlier, classical DEA models measure the relative efficiency of a
DMU described by its input and output quantities in terms of maximal radial
contraction to its input levels or expansion to its output levels feasible under
efficient operation, but this is not valid any longer in contexts where also ‘‘bads’’
have to be considered (Chung et al. 1997; Dyckhoff and Allen 2001; Seiford and
Zhu 2005). In the literature several approaches for incorporating undesirable
outputs in DEA models have been proposed, but a general protocol is not clear
(Scheel 2001). We must underline that efficiency scores, and rankings, may change
for different approaches (Dyson 2001).
We propose a modified DEA model that incorporates undesirable outputs as
inputs, while also seeking to minimise them (Coli et al. 2008, 2011). These factors
will be included directly into the linear programming problem, just like inputs that
have to be radially reduced. Hence, in this application the general DEA formu-
lation includes the following constraint:
X
n
h0 htj0 kj htj 0; t ¼ 1; . . .; z ð5:5Þ
j¼1
where hij is the amount of the tth input to DMU j and the multiplier h shrinks both
inputs and environmental variables in an equi-proportional manner.
5.3 Data and Results
We applied the efficiency concept seen before to 15 European countries for the
year 2005. For our analysis, we considered three non-financial business economic
sectors, according to NACE (Nomenclature statistique des activités économiques
dans la Communauté européenne) definition: manufacturing, construction and
distribution trades. We decided to analyse only these three sectors, because they
register the greatest number of accidents in Europe.
In an assessment of comparative performance the first and the most important
stage is the identification of the input and output variables. In order to model
relative efficiency of a set of DMUs it is necessary to define a production function
which captures the key points of the production process. In our specific case, we
defined a model characterised by a single input, the number of persons employed,
and a single desirable output, the value added (in Euros) for each sector. Moreover,
Table 5.1 DEA efficiency DMU Manufacturing Construction Distribution

scores by European countries trades
for the year 2005
Belgium 0.7436 0.6155 1
Denmark 0.4120 0.7322 0.9899
Germany 1 0.5461 1
Greece 0.2652 0.4764 0.4826
Spain 0.6836 0.4755 0.6737
France 0.8844 0.6137 1
Ireland 1 1 1
Italy 0.6974 0.4781 0.7586
Luxembourg 1 1 1
Netherlands 0.8077 0.7501 0.9480
Austria 0.5569 0.5972 0.8651
Portugal 0.1469 0.1887 0.3657
Finland 0.4763 0.6080 0.9690
Sweden 0.8186 1 1
United Kingdom 1 1 1
Table 5.2 Summary Manufacturing Construction Distribution

statistics for DEA efficiency trades
scores
Mean 0.6995 0.6721 0.8702
Minimum 0.1469 0.1887 0.3657
Maximum 1 1 1
Standard deviation 0.2671 0.2338 0.2007
Table 5.3 Spearman rank Manufacturing Construction Distribution

correlation coefficients trades
Manufacturing 1
Construction 0.666 1
Distribution trades 0.828 0.783 1
as mentioned in the introduction, the application of efficiency techniques to this

context has motivated the inclusion of a special kind of output, an undesirable
output, represented by the number of industrial accidents resulting in three days or
more off work. All the data has been obtained from Eurostat.
The non-parametric efficiency measures are computed by using the modified
input-oriented DEA model under a variable returns to scale assumption, because of
the large variation in size of the units (VRS assumes that changing inputs will not
result in a proportional change in outputs). The linear program associated with the
model is solved using DEA-Solver, a software developed by Kaoru Tone (Cooper
et al. 2000).
DEA technique provides very detailed information about the analysed DMUs,
providing individual efficiency scores for each of them, peer groups and produc-
tion and consumption objectives for those that are inefficient. Table 5.1 shows, for
Table 5.4 Reference sets

Peer set— Frequency to Peer set— Frequency to Peer set— Frequency to
manufacturing other DMUs construction other DMUs Distrib. trades other DMUs
Germany 0 Ireland 9 Belgium 5
Ireland 9 Luxembourg 1 Germany 1
Luxembourg 3 Sweden 6 France 0
United 6 United 8 Ireland 4
Kingdom Kingdom
Luxembourg 0
Sweden 1
United 1
Kingdom
each sector evaluated, the efficiency ratings obtained from the input-orientated
BCC model.
In particular, evaluation of DMUs by means of our model shows that in the
manufacturing sector four DMUs are BCC-efficient: Germany, Ireland, Luxem-
bourg and United Kingdom. Besides, many countries do not have very high rat-
ings. In the construction sector, we register the entrance between the top
performers of one more country, Sweden (in the manufacturing sector it was quite
close to the frontier having an efficiency score equal to 0.8186). On the other hand,
Germany returns to be inefficient and several of the others countries receive very
low ratings. Finally, we examined the distribution trades sector. Seven of the units
form the efficient frontier: we can observe that two more countries (Belgium and
France) move on the efficient frontier and Germany returns to be efficient. Besides,
one country—Denmark—is very close to the frontier having the efficiency rating
of 0.9899. The remaining countries are sub-efficient but they do not show very low
ratings.
Table 5.2 presents a summary of the efficiency ratings for all sectors analysed.
We can see that the distribution trades sector shows a higher average efficiency
score and displays less variability than other sectors.
On the basis of these results we proceeded to a correlation analysis among the
efficiency measures obtained for the three different sectors. We observed quite
high Spearman rank correlation coefficients between the technical efficiency
rankings (Table 5.3).
An important additional aspect of the discriminating power of DEA is its ability
to identify a meaningful group of peer units which have similar characteristics to
those of an inefficient DMU. Table 5.4 displays the frequency with which efficient
countries appear in the peer group of the inefficient ones. In the manufacturing
sector, Ireland and the United Kingdom appear quite frequently in the reference
sets (9 and 6 times, respectively). In other sets, the most frequent units are Ireland
(9 times), United Kingdom (8) and Sweden (6) in the construction sector and
Belgium (5) and Ireland (4) in the distribution trades sector. On the other hand,
Luxembourg and Germany are not likely to be better role models for less efficient
units to emulate.
5.4 Conclusion
In this work we evaluated the performance of 15 European countries for the year
2005 in three economy sectors—manufacturing, construction and distribution
trades—in respect to the number of workplace accidents. To this purpose, we have
obtained measures of technical efficiency by means of the non-parametric
approach to efficiency measurement, represented by Data Envelopment Analysis.
The results provided by the BCC DEA model shows that there is not a sub-
stantial difference between manufacturing and construction sectors: DMUs are not
operating at a very high level of efficiency and there is room for improvement in
several countries. The mean efficiency score is 0.6995 and 0.6721, respectively. In
the distribution trades sector, instead, seven countries are efficient and the mean
efficiency score is 0.8702. In addition, we can observe that Ireland, Luxembourg
and United Kingdom are always located on the efficiency frontier, for each sector
evaluated. Furthermore, Ireland and United Kingdom appear very frequently in the
reference sets of efficient units.
However, we must point out that the efficiency degree obtained by each unit is
relevant only in the context analysed, so, only relative to the chosen model and to
the sample examined: if we include a new DMU in the sample or if we assume
different model specifications, we could obtain different efficient units or different
efficiency degrees.
Finally, it must be remembered that the efficiency analysis applied in this work
can be improved. First of all, we could include additional key variables or we
could apply the model proposed to further application studies, for comparing the
performance in other territorial systems, such as Italian regions, European coun-
tries, etc., and also in other sectors, such as the transportation and logistic ones.
Moreover, we could carry out a performance analysis over time (Sengupta 2000),
when data become available.
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Academic Publishers, Boston
Part II
Groups Structurally Vulnerable
to Social Exclusion
Chapter 6
Social Exclusion and Offending
Roger Bowles
Abstract Social exclusion is costly for both its victims and for mainstream
society which may experience negative externalities from excluded or marginal
groups and contribute resources to support them. Offending behaviour (the prin-
cipal area of interest in this paper) is costly to its victims and to society and is
closely intertwined with exclusion. Offending is often found in association with
other indicators of exclusion such as unemployment, problematic substance misuse
and mental and physical health issues. The paper uses a generic model of
offending, based on the notion of human capital development, viewed from the
wider context of social exclusion. It seeks to avoid two criticisms of standard
economic models of crime, namely that they tend to be static rather than dynamic
and also that they omit any treatment of adolescence during which preferences and
planning skills are still in their formative phase. The paper uses data from a
number of contemporary English surveys to test the principal conjectures on which
a more general, economics-based approach to offending might be developed. The
paper concludes that an approach that considers the role of social exclusion
provides a better understanding of offending than one that treats crime purely as an
enforcement issue.
Keywords Offending Social exclusion Poverty Adolescent development

Unemployment Reconvictions
JEL Codes I24 I32 I38 J71 K42
R. Bowles (&)
York Criminal Justice Economics, York, UK
e-mail: roger.bowles@btopenworld.com
106 R. Bowles
6.1 Introduction
Social exclusion is costly for both its victims, who typically enjoy a lower quality
of life than others, and for mainstream society which may experience negative
externalities from excluded or marginal groups and contribute resources to support
them through provision of public services and social security payments. Offending
behaviour (the principal area of interest in this paper) is costly to its victims and to
society at large as citizens and governments seek to prevent crime and to enforce
criminal law. Social exclusion and offending are closely intertwined, offending
being either or both a symptom and a product of exclusion.
Although offending is frequently associated with social exclusion, of course, the
two things are not synonymous: some offences are committed by individuals who
are not excluded and many who are excluded do not offend. Offending, never-
theless, is often found in association with other indicators of exclusion such as
unemployment, problematic substance misuse and mental and physical health
issues: Cunliffe and Shepherd (2007), Ministry of Justice (2010a) and Vennard
(2007). The question then becomes whether there is any kind of causal link
between social exclusion and offending and, if so, whether there is a particular
direction of causation and whether the two phenomena are mutually reinforcing.
Crime reduction is one of the key domestic policy goals of governments in many
countries, with the result that developing a better understanding of the relationship
between social exclusion and offending is an important research objective.
This paper sets out to use models from economics as a means of illuminating
behaviour that is more often approached through other disciplines such as crimi-
nology, sociology and psychology. Much of the economic literature to date
concerned with crime uses an approach that seems rather sterile when viewed from
a social exclusion perspective. The purpose of this paper is to set out a generic
model, based on the notion of human capital development, which is able to treat
offending in the wider context of social exclusion.
6.1.1 Economic Analysis of Crime
Some economists looking at crime have treated both poverty and offending as
products of common underlying causes such as a lack of effort (Ehrlich 1973), and
this argument could probably be extended to encompass the broader notion of
social exclusion. The argument, in effect, is that social exclusion is endogenous
and reflects choices that individuals have made in the light of their endowments
and proclivities. The unwillingness of economists to contemplate ‘paternalistic’
intervention means that decisions about lifestyle and behaviour are treated as
purely private matters. The object of criminal law in these circumstances is to
provide a set of enforcement probabilities and punishments that minimises the
aggregate social costs of crime and its control. In the standard Becker model of
6 Social Exclusion and Offending 107
crime, offending is a static decision individuals make in the light of information

about the size of the potential gain relative to the risk of getting caught and
punished: Becker (1968). The policy maker chooses an enforcement budget
(including spending on police and public order) in order to influence the pro-
duction of negative externalities and thereby to minimise the aggregate social cost
of crime plus crime control: Bowles et al. (2008).
But there are (at least) two key elements in this characterisation that are open to
challenge.
First, ‘endowments’ (for these purposes) have to include the characteristics of
the parents and carers of children and young people. A lot of offending is done by
adolescents, whose cognitive development and life experience is still at a com-
paratively early stage. The influence of home background on the attitudes of these
young people as they develop is bound to be substantial. Although judged mature
enough to be of a criminally responsible age many of these young people will not
have developed the capacity to anticipate the full consequences of their actions for
themselves and others. They may still lack the planning and anger management
skills to behave responsibly towards other citizens and to understand the negative
externalities they may be imposing. For the high offending risk age range of
roughly 13–18 there is a tension between treating individuals as being fully
responsible from a criminal perspective1 and as being still in need of guidance
from parents, educators and others as to appropriate bounds of behaviour and
the impact of their actions on others. Making parents or carers vicariously
responsible for the crimes of adolescents may not be a very successful policy
strategy, since many may themselves be poor role models.
Secondly, the deterrence model is a static one that neglects dynamic effects that
may modify optimal enforcement policy. This is particularly significant in
discussion of the relationship between social exclusion and offending. Offences
can be regarded as one-off events whereas social exclusion is a state of being that
continues into the future. A conviction may influence the degree of exclusion an
individual faces in the short term. But the record of this conviction will remain and
may have untold consequences for the exclusion the individual feels into the
future. The ‘knock-on’ effects of a criminal conviction for the ability to find a job,
accommodation, access to credit and other markets tend to be cumulative and
mutually sustaining. A conviction, for example, may mean that an applicant finds
it very difficult to get through any initial screening of job applications. This
heightens the risk of long-term unemployment which in turn means that the
individual has less to lose from further offending.
1
The age of criminal responsibility is currently 10 in England and Wales. There is, however,
wide variation even across the EU where in some countries it is lower, and some where it is
substantially higher, such as the Scandinavian countries where it is 15.
108 R. Bowles
6.1.2 Implications
The implications that flow from the proposition that social exclusion and offending
are both products of inadequate effort on the part of individuals who have not
bothered to invest sufficiently in human capital are unpalatable to many social
researchers. It suggests a punitive, enforcement-orientated criminal law enforce-
ment approach rather than a co-operative approach based on the argument that
measures to re-include offending citizens may be welfare-increasing.
Social exclusion can be seen almost as a policy tool since it enables a degree of
‘punishment’ to be imposed without incurring the resource costs associated with
locking offenders in prison or providing community-based supervision. Although
this kind of approach has the advantage that it respects individual tastes, prefer-
ences and choices it is clear that as an enforcement device social exclusion
imposes high costs of its own. Once individuals come to feel excluded their
incentives to seek reintegration may be weakened and over the longer term this
may prove very costly in terms of lost output.
The literature on ‘million dollar blocks’ (small areas of housing with a high
concentration of offenders that absorb large amounts of public resources and
contribute little by way of productive activity) is indicative of the concern that the
punitive approach may give rise to concentrations of individuals for whom there is
little prospect of breaking a repetitive cycle of offending, imprisonment and
release followed by further offending: Gladwell (2006) and Martinez and Burt
(2006). The cost of imprisoning offenders is just a part of the larger cost of
managing a group that may become increasingly dysfunctional from a social
perspective. These wider costs might include the costs of dealing with neglected or
abused children, run-down social housing, high rates of unemployment, substance
misuse and domestic violence and so on: Elliott-Marshal et al. (2005) and Harper
et al. (2005).
There are other features of offending careers that cause many non-economists
working in the criminal justice field to be sceptical about deterrence-based
‘solutions’. For one thing, the peak rates for offending come during adolescence
and the offending rate for males at this stage of development is much higher than
for females. This implies that there may be a biological basis for a lot of offending.
A corollary is that a lot of offending occurs at a stage in the life course when
cognitive skills are still developing and when young people have not developed
their capacity to anticipate, and take responsibility for, the consequences of their
actions.
On this view the best response may be to intervene with youngsters who offend
by providing them with behavioural treatment and by supporting parents who lack
the capacity or inclination to help their children to develop these skills. Looked at
from a social exclusion perspective this is to argue that children growing up in a
deprived, poor area with a high crime rate and with parents who are themselves
excluded may lack the cognitive skills and associated resilience to avoid getting
drawn into a feckless, offending lifestyle. Their counterparts in affluent areas may,
on average, expect better living conditions, more supportive parents and teachers
and thus have a wider choice of career pathways ahead.
The development of the relationship between these various elements as children
and young people grow into adulthood is a particular focus here. We start from the
stylised facts that offending rates are at their highest during adolescence and that
reconviction rates amongst adult offenders tend to be highest for those whose first
offending was recorded at a particularly early age. Some individuals who offend
while young desist from offending as they mature into adults.2 But others do not
make such a successful transition and remain locked in worlds where many
elements of social exclusion are present. Social exclusion, rather like a black hole
in space, can be easy to fall into as you get close to it and then very difficult to
escape once you are in it.
The paper uses empirical data from a number of different sources to explore the
relationship between offending and social exclusion. That the two phenomena are
closely intertwined is not in dispute. High crime rates are a characteristic of
deprived neighbourhoods: at least in the UK the crime rate represents one of the
very criteria applied in defining and assessing the degree of deprivation in an area.3
But, in many respects more importantly, offending may not just be a symptom of
exclusion so much as a result of it. A report on re-offending by the Social
Exclusion Unit (2002), for example, concluded that:
Before they ever come into contact with the prison system, most prisoners have a history
of social exclusion, including high levels of family, educational and health disadvantage,
and poor prospects in the labour market.
This suggests that what is of interest here is not so much the relationship
between offending and social exclusion per se, but the characteristics which might
dispose a young person to grow up to find themselves socially excluded and also to
become involved in offending. The ideas and empirical regularities on which we
rely are not new, particularly the link between poverty and crime which has been
widely remarked. The novelty lies more in trying to articulate the role that eco-
nomic forces might be playing in driving both exclusion and offending.
6.2 Model
The model underpinning the arguments in this paper is set out in Bowles and
Florackis (2011). A high subjective discount rate is likely to be associated with both
under-investment in human capital and a disregard for the downside reputational
risks associated with offending. It may also be associated with an increased
2
For a glimpse of the statistical analysis of offending careers see Soothill et al. (2009).
3
Crime is one of the seven domains on which the English Index of Multiple Deprivation is
constructed. For further details of the construction of the IMD see: http://www.communities.
gov.uk/publications/communities/indicesdeprivation07
110 R. Bowles
likelihood of becoming involved in problematic substance abuse. By potentially

providing a common cause for both offending and social exclusion it is a useful
means of exploring further the relationship between the two phenomena. In essence
the argument is that certain kinds of household and neighbourhood influences may
result in a lack of engagement with education that leaves the young person at a real
disadvantage in labour markets, and by extension in other markets such as credit and
housing markets. Mutual reinforcement between the excluding influences may find
expression in a high probability of being unemployed, of not having adequate
accommodation, of involvement in substance misuse and, critically, of involvement
in offending and anti-social behaviour. Poor physical and mental health may
accompany, or be exacerbated by, the other symptoms.
We do not seek to provide a new theory of offending but to use the model as a
basis for utilising some of the many datasets in the public domain to explore the
links and relationships between offending and its covariates implicit in the human
capital approach to offending. In particular we try to construct the elements of
social exclusion that are common to the offending behaviour of both children and
young people and of adults. The dynamics of the growing up process are not
discussed in depth, but it seems clear that a model needs to be able to say
something about the evolution of offending behaviour over the life course.
Studies of those convicted of crime provide plenty of evidence of the
co-occurrence of these various indicators of exclusion: Social Exclusion Unit
(2002) and Harper et al. (2005). Offenders commonly exhibit poor employment
histories, inappropriate accommodation, high prevalence of substance misuse and
comparatively high incidence of physical and mental health issues. Not only does
this mean that offenders are prone to being socially excluded. It also makes it
difficult for them to become re-included. Many of the components of exclusion are
mutually re-enforcing, so that well-intended interventions that address some but
not all of an offender’s issues may fail. To make support to offenders all-
embracing may sometimes be effective but it is very costly and may, in any event,
be unwelcome to the offender society is trying to resettle.
The model of social exclusion on which we rely is depicted in Fig. 6.1. Its
cornerstone is the low investment in human capital lying at its heart. This is seen
as a product in part of personal psychology and preferences but a product also of
non-supportive households and of negative attitudes that may characterise a
deprived neighbourhood. The non-supportive household may comprise parents or
carers who are frequently absent or disinterested in children. As well as lack of
care this may manifest itself in an incapacity or unwillingness to provide children
with life skills and support for the development of cognitive skills, such as
planning skills and the management of anger and impulsivity.
If financial resources are tight then the household may well be unable to supply
financial support for investment in any further education (for 16-18 year olds) or
higher education (beyond the age of 18). In many cases, however, the damage will
have been done before this stage. For example failing to ensure that children attend
school regularly may mean that the children never acquire the basic qualifications
that are needed as a pre-requisite for further study.
Fig. 6.1 Model of human Non-

capital formation and supportive Poor employment
household prospects
offending
Low effort: peer

pressure, Low accumulation Increased probability
truancy, of human capital of substance misuse
exclusion and/or poor physical
& mental health
Cognitive skills
Increased probability
under-developed
of offending
6.3 Social Exclusion and Youth Offending
From a life course perspective social exclusion may be a temporary or a permanent

feature. For some children and young people brought up in conditions of poverty
there is the possibility of escaping social exclusion later by means of educational
achievement and/or success in the labour market. For others the prospects may
remain poor. But a more affluent background is not a guarantee of insurance
against social exclusion. A combination of substance misuse, unemployment and
offending (for example) can result in exclusion for those with the wealthiest of
starts. Nevertheless it remains the case that social exclusion is much more com-
monly experienced in adulthood by those brought up in a deprived area. Evidence
in support of this contention can be derived in various ways. In England and Wales
increasingly detailed empirical studies of the characteristics of those who have
been imprisoned point consistently to the over-representation of certain charac-
teristics of childhood among prisoners.
6.3.1 Surveying Prisoner Crime Reduction
A recent report concerned primarily with reconviction risks in England and Wales
(Ministry of Justice 2010b, following an interim report, Stewart 2008) incorporates
findings from the Surveying Prisoner Crime Reduction (SPCR) source. This is a
‘large, general purpose longitudinal cohort survey of 3,849 prisoners (..) sentenced
to between one month and four years’. Sample 1 (the part of interest here) com-
prised 1,435 prisoners, based primarily on those sentenced in 2005–2006. These
prisoners were asked about background factors such as childhood experiences and
data were collected on their convictions’ history from the Police National Com-
puter, the most authoritative source of secondary data on offending.
From the data in Table 6.1 it can be seen that prisoners are much more likely
than a random sample of the population at large to have experienced various kinds
of disadvantage as children. A high proportion experienced abuse and a very high
proportion witnessed violence in the home. Nearly 40% had been brought up in a
112 R. Bowles
Table 6.1 Childhood experience of prisoners

Yes No Total Yes
responses (%)
Experienced abuse as a child 412 1,013 1,425 28.9
Observed violence in the home as a child 579 847 1,426 40.6
Respondent taken into care* up to the age of 17 347 1,079 1,426 24.3
‘Has anyone in your family ever been found guilty of a non- 519 881 1,400 37.1
motoring criminal offence other than yourself?’
‘Did you regularly play truant or skip school without 838 587 1,425 58.8
permission?’
‘Were you ever expelled or permanently excluded from school?’ 596 830 1,426 41.8
Source: Adapted from Ministry of Justice (2010b): Tables 2.2, 2.4, 2.6, 2.9, 2.22 and 2.24 can be
inspected at: http://www.justice.gov.uk/publications/docs/spcr-full-tables-paper-5-2-prisoners-
backgrounds-reconviction-a.xls
* This includes living with foster parents or in an institution
household where another family member had been convicted of a criminal offence.
Spending formative years in such environments appears to leave many children
susceptible to becoming offenders themselves in later life.
An immediately striking feature is the high proportion (24.3%) who had been
taken into care as children. It is not easy to make an exact comparison with the
population at large but, as an indicator, in 2001 there were 58,900 children and
young people in care4 out of a total population of 11.28 million in the relevant age
range (0–18). Those in care thus represented just 0.52% of the population. Reasons
for being in care vary widely as does the kind of care provided, some living with
foster parents others in residential accommodation funded by the government. But,
as a group, these young people represent a high risk of offending in the future and
of continued social exclusion.
A further finding from Table 6.1 is that a high proportion (nearly 60%) had
played truant from school and a high proportion (over 40%) had been excluded
from school. A finding from Table 2.23 in Ministry of Justice (2010b), not
included in Table 6.1 here, is that the reconviction rate for those prisoners who had
regularly played truant was 61.1% compared with 38.8% for those who had not.
The link between offending, truancy and exclusion from school was already well-
established before the 2010 report. Bowles et al. (2005), for example, used truancy
rates and exclusion from school rates to assess the impact of a crime reduction
programme implemented in schools because of the link known to exist between
offending and absence from school.
The rates of truancy and exclusion exhibited by prisoners serve to reinforce the
observation of the link with offending behaviour. As an indicator of how high these
proportions are, compare them with the rates reported in Table 6.2, which is based
4
The data were taken from the following site: http://www.education.gov.uk/rsgateway/DB/
VOL/v000509/contents.shtml
Table 6.2 Suspension from school and the offending propensity

Have you ever been suspended
from a school?
Yes No Total Suspended (%)
Have you been arrested during Yes 46 100 146 31.5
the past 12 months? No 299 3,597 3,896 7.7
Total 345 3,697 4,042 8.5
Arrested (%) 13.3 2.7 3.6 –
Source: Author’s analysis based on data from OCJS: (see disclaimer at end)
on findings from a quite different, non-prisoner survey. The Offending, Crime and
Justice Survey (OCJS) was the first national longitudinal, self-report offending
survey for England and Wales. This survey5 asked a sample of children and young
people (aged between 10 and 25, drawn from the general public) a series of
questions about their involvement in offending and drug use and about the envi-
ronment in which they live. The OCJS was run annually over a four year period
(2003–2006). Table 6.2 reports a cross-tabulation of those saying they had been
arrested during the previous 12 months and those who said they had ever been
suspended from school. The proportion of those arrested who had been suspended
at some stage (31.5%) was much higher (more than four times as high) than for
those who had not been suspended (7.7%). Likewise, of those who had ever been
suspended the proportion arrested was much higher (13.3%) than it was for those
who had not been suspended (2.7%).
Evidence from the latest report of the Youth Survey (conducted annually for the
Youth Justice Board) is also consistent with the notion that truancy is correlated
with the offending propensity. Of those young people in mainstream education
who had never played truant (just over two-thirds of the valid sample), 12% had
committed an offence. This rose to 36% for those who had played truant on no
more than two occasions, and 49% for those who had played truant more than
twice.6
The inescapable conclusion is that poor attendance at school and exclusion
from school are significant risk factors for offending. For purposes of testing our
model, however, the conjecture is that it is the effect on the formation of human
capital that is mediating at least some of this influence: a correlation between
exclusion and offending could potentially be explained in other ways.
Some indirect evidence on the relationship between school behaviour and social
exclusion is provided by data from the 2009 Youth Survey: Youth Justice Board
(2010). Table 6.3, based on these data, shows that pupils who had been excluded
from mainstream schools and moved to Pupil Referral Units (PRUs) (typically on
the basis of behaviour that was disruptive to other pupils in mainstream schools)
5
The datasets are held at the Economic and Social Data Service at the University of Essex,
available via:http://www.esds.ac.uk/findingData/ocjsTitles.asp
6
Youth Justice Board (2010) at p. 139.
114 R. Bowles
Table 6.3 Exclusion from Mainstream Pupil Referral

mainstream education education (%) Unit (%)
Living in single 23 45
parent household
Father in full-time 68 42
employment
Mother or step/foster 41 30
mother in full-time
employment
Source: Youth Survey 2009: Youth Justice Board (2010)
tended to have a different home environment from pupils in mainstream schools.

The proportion of PRU pupils living in a single parent household was higher and
the proportion with a working parent was lower, suggesting they suffered greater
social exclusion than those in mainstream education.
It is helpful at this stage to return to the SPCR data. Table 6.4 reports the ages
at which prisoners had been first arrested and at which they had left school. The
great majority of prisoners had left school by the minimum school leaving age,
currently 16 in England and Wales (having been 15 at the time when some of the
older prisoners in the sample would have left school).
Only 14.6% of the prisoners had stayed on at school beyond the age of 16.
Leaving at or before the statutory age substantially constrains the scope for
investing in human capital. Some may have gone on to vocational training
schemes on leaving school but many will not have. Empirical data on earnings
show that lifetime earning streams are significantly higher for those getting a
minimum set of examination passes at age 16: Bowles et al. (2005). Unfortunately
the SPCR survey did not ask about the quality of educational attainment by
prisoners: it asked just a generic question about whether they had ‘any qualifi-
cations’. Table 6.4 indicates also that 55% of prisoners in the SPCR sample had
been arrested by the age of 16.
As with much other evidence in the field this cannot be used to establish
anything reliable about the sequence of events or the direction of causality: for
example it does not help establish whether truancy tends to pre-date offending or
vice versa. Offending often goes unobserved and, in any event, the conjecture is
that both offending and weak attendance are symptoms with a common cause.
6.4 Reconviction and Social Exclusion
A quite different way of looking at offending in relation to the life course and its
relationship with social exclusion is to use data from adult offending careers to
look back from an adult’s offending career towards possible precursors of their
offending when young. In terms of Fig. 6.1, this has a focus on the right hand part
Table 6.4 Age at first arrest and at leaving school

Up to 13 14 15 16 17 18 & over Total
Age at first arrest Number 231 490 594 1,315
% 17.6 37.3 45.2 100
Age at leaving school Number 0 258 419 510 83 120 1,390
% 0 18.6 30.1 36.7 6.0 8.6 100
Source: adapted from Tables 2.7 and 2.26 of Ministry of Justice (2010b)
Table 6.5 Ministry of Problem staying One year N Proportion of the

Justice findings on pre- off drugs before reconviction sample (%)
custody drug use and custody? rate (%)
reconviction rates
No 46 2,825 42.3
Yes 75 2,073 57.7
All 58 4,898 100
Source: Adapted from Table 4 of May et al. (2008)
of the diagram: it is concerned with offending behaviour given a low level of

investment in human capital.
Until recently offending data and data on other aspects of an offender’s situation
were kept largely separate, so that offending careers tended to be viewed, in
isolation, as a sequence of offences comprising a convictions’ record. Pressure to
find ways of reducing the proportion of offenders being reconvicted, along with
improved databases on offenders, has resulted in increasing interest in exploring
offending careers in relation to a variety of social and other variables: Ministry of
Justice (2010a, b) and National Audit Office (2010). From the published findings
from this work it is possible to apply a degree of hindsight to offending careers.
Three resettlement surveys of prisoners were conducted in 2001, 2003 and
2004: May et al. (2008). A representative sample of 4,898 prisoners in the last
three or four weeks of custody was asked about their circumstances before and
during prison. These data were later matched with reconviction data from the
Police National Computer to generate a dataset with which reconviction rates
could be modelled. Table 6.5 indicates that 57.7% of the offenders had had
problems staying off drugs before custody. This group had a 12 month recon-
viction rate of 75% compared with 46% for those who had not had such problems.
Of more direct interest from a human capital perspective is a second table taken
from May et al. (2008) identifying reconviction rates by reference to expected
employment after release. As with the previous table, the interest lies more in the
proportions of prisoners in each category than in differences in the reconviction
rates, revealing though these are. Table 6.6 indicates that a little under a quarter of
the sample had a paid job to go to while over half expected to be looking for a job
or course, not an enviable task on release from prison. The comparatively high
reconviction rate for all groups in the sample gives an indication of the difficulty in
general of persuading individuals to give up offending once they have started.
116 R. Bowles
Table 6.6 Ministry of Justice findings on employment status and reconviction rates
Expected employment or other status One year reconviction N Proportion of the
after release rate (%) sample (%)
Paid job to go to 45 1,105 22.6
Training or education to go to 56 282 5.8
Looking after home or family 53 53 1.1
Long-term sick or disabled 58 413 8.4
Looking for job or course 62 2,683 54.8
Do not want to work or train 75 103 2.1
Other including retired 64 259 5.3
Total 58 4,898 100
Source: Adapted from Table 8 of May et al. (2008)
Table 6.7 Logistic regression analysis of 12-month reconviction outcomes

Variable Odds ratio Significant at 5%
level
Aged 18–20 7.35 Yes
Aged 21–24 3.43 Yes
Aged 25–29 2.01 Yes
Aged 30–39 1.51 Yes
Aged 40 ? (reference category) 1.00 N.a.
Drug problem before custody 1.87 Yes
Both accommodation and employment problems 1.43 Yes
Victim awareness course 0.70 Yes
Other variables not reported here include number N.a. N.a.
of previous convictions and offence type
Source: adapted from Table 2 of May et al. (2008)
A third table (Table 6.7) adapted from the same paper summarises findings
from a multiple logistic regression analysis based on a binary reconviction
dependent variable. It provides estimates of the relative strength of influences on
the likelihood of an individual being reconvicted within 12 months of release from
prison. The pattern of the coefficients on the age group dummies shows that the
reconviction risk falls sharply as the individual progresses through young
adulthood.
The findings provide further evidence that those with a drug problem before
custody are substantially more likely to be reconvicted. The conjectured link
between offending and social exclusion7 finds further support, the combination of
accommodation and employment problems being associated with a significantly
heightened reconviction risk. Again however, it is important to be wary of
7
Earlier evidence of such a link was documented by Niven and Olagundoye (2002) and Niven
and Stewart (2005).
Table 6.8 Prisoner mental Yes No Total Yes (%)

health
Mental health illness or depression 177 1,254 1,431 12.4
as a longstanding illness?
Treated/counselled for a mental 241 1,192 1,433 16.8
health or emotional problem
in the year before custody?
Source: Ministry of Justice (2010b) Tables 4.1 and 4.6
implying causation here. The employment (or accommodation) outcomes may

share with the reconviction risk a common cause.
It is instructive to consider which of the list of variables originally included in
the model8 was excluded in this final specification, since many involved exclusion
characteristics. For example no education measures (such as whether the offender
had any qualifications) survived. However, the number of convictions (by deciles)
was included and it is quite likely that there would, for example, have been a non-
negligible correlation between educational status and ranking in the convictions’
distribution. So it might not be safe to conclude from the findings that educational
status plays no role in reconvictions. The conclusion, rather, is that education plays
no further significant part once allowance has been made for the number of
convictions. Models of this kind are useful for assessing reconviction risk but are
less useful for identifying the underlying influences on offending decisions.
It has been long established that offenders are more likely than average to suffer
from various forms of mental ill health. The standard reference, based on a
psychiatric morbidity survey in England and Wales conducted in 19979 (Singleton
et al. 1998), found that 7% of male sentenced prisoners, 10% of men on remand
and 14% of female prisoners had a functional psychosis (such as schizophrenia or
manic depression) in the year prior to interview. In addition, the proportion of
respondents with significant neurotic symptoms, such as anxiety, depression and
phobias, in the week before interview were far higher than found in a similar
household survey and ranged from 39% of male sentenced to 75% of female
remand prisoners. Further evidence of there being a comparatively high incidence
of mental health issues amongst prisoners, as summarised in Table 6.8, comes
from the SPCR survey.10
Accommodation is another indicator of the degree to which individuals are
socially excluded. As with other elements of exclusion poor accommodation is
likely to be associated with offending whether as a contributory factor or as a
consequence. Imprisonment is likely to interrupt tenancy agreements and the
consensus is that offenders leaving prison with no accommodation are likely to
return to past friends and associates with the risk that they will return to substance
8
A full listing of the variables included can be found in Table 1 of May et al. (2008).
9
The findings are summarised at: http://www.statistics.gov.uk/ssd/surveys/survey_of_psychiatric
_morbidity_among_prisoners.asp
10
Op. cit.
118 R. Bowles
Table 6.9 Accommodation status prior to imprisonment

Number percent
House or flat owned by prisoner or partner 163 11.4
House or flat rented by prisoner or partner 491 34.2
House or flat part-owned by prisoner or partner 34 2.4
Paying board in a house or flat owned by someone else 162 11.3
Paying board in a house or flat rented by someone else 117 8.2
Living rent-free in a house or flat owned by someone else 176 12.3
Homeless/Temporary accommodation 96 6.7
Homeless/Sleeping rough 125 8.7
Living with family member 49 3.4
Other 21 1.5
Total 1,434 100
Source: Ministry of Justice (2010b) Table 2.29
misuse and offending. Arranging alternative forms of housing, supplied by the

voluntary or statutory sectors, requires knowledge and cognitive skills that
offenders may lack. Managers responsible for offenders post-release therefore
often find it worthwhile to provide accommodation support. But as well as being a
result of imprisonment, poor accommodation may increase the likelihood of
offending. Peer pressure to be involved in substance misuse and/or offending is
likely to be greater where an individual is sharing accommodation with others
involved in these activities.
In more extreme cases, offenders who are homeless may feel they have little to
lose from offending and imprisonment. Prison provides a daily routine plus regular
meals and clothing and thus may provide refuge of a sort from a harsh street life.
Evidence from the SPCR, summarised in Table 6.9, is that fewer than half of
prisoners were living in a regular house or flat that was owned or rented by
themselves or a partner. This gives a sense of the transient, chaotic lives many
were leading before being imprisoned. As was pointed out above, imprisonment is
likely to threaten such stable tenancies as individuals have established. One of the
‘hidden costs’ of imprisonment results from the likelihood either that other
members of a household have to re-locate or that accommodation goes unused.
A neighbourhood’s crime rate is one of the components of its Deprivation Index
score,11 and it is well-established (if in some ways slightly circular) to say that
crime rates are higher in more deprived areas. A simple way of demonstrating the
relationship between offending and the local environment is to compare crime
victimisation rates for those who themselves offend with those who have not
11
Other components (in addition to the Crime domain) of the Index of Multiple Deprivation in
England and Wales are income, employment, health and disability, education/skills/training,
barriers to housing and services and living environment.
Table 6.10 Offending and Were you a victim of

victimisation rates crime in the last year?
No Yes Total Yes (%)
Did you commit an No 1,925 1,574 3,499 45.0
offence during Yes 424 917 1,341 68.4
the last year? Total 2,349 2,491 4,840
Source: Offending, Crime and Justice Survey, 2005, 3rd edition,
UK Data Archive
offended. From Table 6.10, based on data from the OCJS of 2005,12 it can be seen
that 68.4% of those who had offended had themselves been a victim of crime
compared with 45.0% of those who had not.
6.4.1 Anomalies
The empirical regularities and correlations demonstrated seem all to be broadly

consistent with the conjecture that a high propensity to offend is closely associated
with an array of other indicators of social exclusion and, in particular, with less
than average accumulation of human capital. However, there are some aspects of
offending careers which remain unexplained using such an approach. Two of the
more obvious ones are (a) that males are convicted substantially more frequently
than females13 and (b) that the likelihood of conviction (and reconviction) declines
very appreciably and varies predictably (although non-linearly) with age14:
Ministry of Justice (2010b) and Bowles and Florackis (2007).
Figure 6.2 illustrates the grounds for supposing that there is a biological basis
of some sort for the offending propensity. Offending by girls reaches a peak at 15
and declines thereafter. For boys the propensity is still rising at age 17, although
the rate of increase with age is slower from 16 to 17 than it is for 15 to 16.
In the criminology literature these tendencies are ascribed to differences in
gender development and to the idea that as individuals age they become more
likely to settle down with family responsibilities which reduce their propensity to
offend. This is puzzling to the extent that a career path based on low investment in
human capital during adolescence along with involvement in offending is not a
promising foundation on which to build a successful labour market career in later
12
Home Office. Research, Development and Statistics Directorate. Offending Surveys and
Research, National Centre for Social Research and BMRB. Social Research, Offending, Crime
and Justice Survey, 2005 (computer file). 3rd Edition. Colchester, Essex: UK Data Archive
[distributor], December 2008. SN: 5601.
13
During the second quarter of 2010, for example, males represented 85.2% of those sentenced
in all courts in England and Wales.
14
Detailed sentencing statistics for England and Wales are available from: http://
www.justice.gov.uk/sentencingquarterly.htm
120 R. Bowles
45,000
Male
Female
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
10 11 12 13 14 15 16 17 18
Fig. 6.2 Youth crime disposals by age and gender, 2008/2009. Source: Graph based on youth
justice statistics from the Ministry of Justice website: http://www.justice.gov.uk/publications/
youth-justice-statistics.htm
life. Social exclusion does not disappear with age but it seems that offending, and
possibly substance misuse, does at least decline with age.
Bowles and Florackis (2011) develop a model in which a decline with age in the
propensity to offend is attributed to a reduction in the subjective discount rate.
As individuals develop psychologically through adolescence and into early
adulthood their planning skills and capacity to anticipate the future improve. The
downside risks of offending may then feature more strongly, and may be com-
pounded as judges increase the punishment tariff with repeated offending. This
conjecture is argued to be consistent with the age-profiles of offending in Fig. 6.2
on the grounds that females mature at an earlier age than males.
6.5 Policy Options
Encouraging young people to attend school and to pass examinations does not
sound very path-breaking but seems to be the most direct means available of
opening up labour market opportunities and thereby promoting resilience against
social exclusion. Many criminal justice professionals are convinced that the best
form of investment in crime reduction is early intervention in the form of (crime)
prevention work with young people: Ashford (2007). In England and Wales youth
crime prevention work is aimed both at younger children (in the 8–12 age range)
and at adolescents in the 13–17 age range. The prevention work recognises the
importance of school in providing a sound education and qualifications that can
provide a foundation for acquiring job market skills. Evidence from adult
offenders shows a heavy over-representation amongst those who achieved few
qualifications and those who attended poorly or were excluded from school on the
basis of bad behaviour.
The problem, of course, is that the policy instruments available may not be very
effective. Persuading a young person who receives little support from their family
(who may themselves be socially excluded because of substance use, unemploy-
ment, ill health or whatever), who has rebellious friends and little interest in
schoolwork that it is worthwhile studying hard is likely to be a hard sell. For some
in this position the wretchedness may itself act as a positive trigger and fire a
determination to escape to a better life. But for many others the response is a
negative one likely to condemn them to a continuing life in which they are
excluded from mainstream society, Economists examining youth crime prevention
programmes have found that the potential for very high returns in some individual
cases may be sufficient to justify investment even where the proportion of suc-
cesses may be small and uncertain: Cohen (1998). The stakes are high in indi-
vidual cases because different choices at critical points in the life course may have
effects that literally last a lifetime. It is difficult to construct convincing empirical
analyses of these propositions because of the lengthy real-time requirements of
cohort studies that cover childhood as well as adult offending careers and because
of the difficulties in establishing credible counterfactuals. It is easier, but less
compelling, to find anecdotes and case studies that illustrate positive outcomes
from interventions in individual instances.
A different way of looking at the policy issue is to consider instead how the
wealth of information about the influences on offending might be used to help
inform an economic analysis of resettlement policy. Using Fig. 6.1 as the focus for
this discussion would suggest a basic split between ‘prevention’ policy aimed at
raising aspirations and encouraging investment in human capital on the one hand
and ‘resettlement’ policy on the other.
Prevention policy can be further split down into three strands: operating on
individual preferences and cognition; operating on household support and oper-
ating on attendance at, and behaviour in, school. Elements of all three are to be
found in contemporary English crime and youth crime prevention programmes.
Cognitive behaviour treatment programmes15 have been used with individual
young people at risk of offending and Restorative Justice programmes have been
used in some cases in an effort to get young offenders to consider the consequences
of their actions for others. Efforts to help parents and carers improve the degree of
support they provide to children and young people have taken the form of both
voluntary and mandatory ‘parenting programmes’. Schools have been encouraged
to take seriously the control of truancy and in many cases have begun working in
partnership with the police to facilitate the identification of children believed to be
at risk of offending. Encouraging young people to invest seriously in their own
futures has always been one of the objectives of educators and the implication of
the findings marshalled for this paper is that the highest priority should be afforded
to this goal in the future.
15
For a review of the rationale and content of such programmes see Hollin and Palmer (2006).
122 R. Bowles
Resettlement programmes, likewise, have traditionally respected many of the

findings here. ‘Holistic’ approaches recognising the wide range of issues faced by
offenders, particularly prisoners at the point of release, have been based on the idea
that an offender’s issues cannot be tackled piecemeal. Programmes based on con-
certed action in relation to a range of issues including substance misuse, mental
health, accommodation, cognitive and training issues have been deployed in efforts
to reduce reconviction rates: Dawson and Cuppleditch (2007) and Vennard (2007).
One barrier to this development has been the potentially wide range across which
may be spread the improved outcomes resulting if and when these programmes are
successful. The traditional metric has been the impact on reconviction rates. Analysts
are becoming aware that success can bring many collateral benefits: Metropolitan
Police (2010). For example, although it has been common for analysts of drug
treatment programmes to take account of the crime reduction impact of their work
they are increasingly coming to take account of other benefits such as improved
quality of life for clients, reduced pressure on health resources, reduced pressure on
facilities for looking after neglected children and improved employment outcomes:
Marsden et al. (2008). Likewise there remains scope for analysts of resettlement
programmes to include a wider range of outcome measures in their measurement of
benefits, since offenders are typically making heavy use of public services outside the
criminal justice system; Davies et al. (2009).
The heavy focus on reconviction rates at one or two years, which has dominated
the English debate on prisoner resettlement and other projected interventions, is
too narrowly based to be an effective measure of the financial returns on projects.
Recent work by economists on drug treatment programmes (such as Davies 2009)
has incorporated health status and health service utilisation measures along with
the cost of reconvictions. There is scope to extend this work into other outcome
measures including employment rates and to apply the same range of outcome
measures in studies of offender programmes as well as health and drug
programmes. An implication of this argument that the consequences of convictions
run more widely is that convictions themselves may be regarded as destroying
human capital insofar as they reduce the likelihood of a legitimate sector
employment career.
There are echoes of this kind of research agenda also in areas such as local
government where many spending programmes (such as social care, housing,
education and police) have an impact on various groups in the population
including offenders. Efforts to identify the costs of providing support to socially
excluded groups such as the elderly or offenders are potentially worth consulting
for the information they may hold on the wider costs of offending. It is worthwhile
noting at this point that the standard analysis of optimal enforcement policy
against offenders omits the wider costs associated with offending. For example the
standard Home Office approach to estimating the economic and social costs of
crime (Brand and Price 2000; Dubourg et al. 2005)16 does not make allowance for
16
See also Cohen (2005)
the possibility of convictions destroying human capital via labour market dis-
crimination against those with criminal records. It therefore runs the danger of
under-estimating the scale of benefits delivered by successful crime reduction
programmes, since standard economic evaluation methodology relies on ‘cost of
crime’ estimates to value programme benefits: Dhiri and Brand (1999) and Bowles
(2010). With substantial pressure on public budgets throughout Europe and beyond
it is important that the costs and benefits as well as the cash flow implications of
criminal justice policy decisions are viewed realistically and thoroughly.
This paper has explored the relationship between offending and social exclusion
from an economic perspective. It argues that making use of the notion of social
exclusion provides a richer model (than the standard economics of enforcement
model) for analysing the context in which offending takes place. By giving the
formation of human capital a pivotal role in the development process it is able both
to incorporate home and social influences on the propensity to under-invest in
human capital and also to provide a basis for analysing decisions (later in life) by
convicted offenders to re-offend. Using recently published data from a variety of
English surveys it suggests that the contemporary policy debate about criminal
justice in Europe, particularly Britain, is more readily explicable using such an
approach than it is when viewed from the perspective of standard, static economic
models.
Social exclusion is viewed as a co-product, with offending, of unwillingness on
the part of young people to invest in their own human capital. This choice may
itself be encouraged by an environment of deprivation and by inappropriate sup-
port of children and young people. There is no simple way of inducing greater
levels of investment at this stage but there are many possible channels through
which encouragement can potentially be supplied. Recent literature on labour
market outcomes has begun to look more closely at the various influences on the
development of cognitive and non-cognitive skills during childhood (Carneiro
et al. 2007; Cunha et al. 2006; Cunha and Heckman 2008; ter Weel 2008) and
there would seem to be good grounds for applying this approach to the analysis of
offending careers.
For adult offenders with a record of convictions effective crime reduction may
require a range of measures including drug treatment programmes, job-related
training, provision of accommodation with positive role models, support for
employers taking on ex-offenders and the choice of appropriate incentive struc-
tures within the social security system. Intervening at this later stage may enable
better targeting of resources but it is likely to be very costly and does not seem to
be very effective. This puts a premium on producing a better understanding of the
early development of offending careers and of the social exclusion with which they
are often embedded.
124 R. Bowles
These kinds of conclusions do, however, have some potentially unpleasant

implications for the perspective of the standard laissez faire model of economics
where individual preferences are sovereign. Particularly where children and young
people are involved there are real difficulties in arguing that society can intervene
legitimately in family life to influence adolescent development and there by
produce socially preferred outcomes.
Acknowledgements The original data creators, depositors or copyright holders, the funders of
the Data Collection and the UK Data Archive bear no responsibility for the analysis or inter-
pretation of the OCJS data referred to in this paper. The author would like to thank two anon-
ymous referees for very helpful comments on an earlier version of the paper.
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Chapter 7
Disability and Social Exclusion
Peter J. Sloane and Melanie K. Jones
Abstract This paper examines the recorded incidence of disability across

European countries and draws attention to the considerable measurement problems
involved in the economic analysis of the phenomenon. However, the distinction
between work-limited and non-work-limited disability turns out to be particularly
helpful in understanding labour market outcomes. Finally, policy alternatives for
increasing the degree of social inclusion of the disabled population are evaluated.
Keywords Disability Measurement Work-limitations Government policy

JEL Codes I1 J2 J7
7.1 Introduction
The objective of improving the relative position of disadvantaged groups has

become a major concern of the European Union, as well as elsewhere. Thus, since
1999 in particular there has been concerted action to ban discrimination on the
P. J. Sloane (&) M. K. Jones

School of Business and Economics,
Swansea University, Swansea, UK
e-mail: p.j.sloane@swan.ac.uk
M. K. Jones
e-mail: m.k.Jones@swansea.ac.uk
P. J. Sloane
National Institute of Labour Studies,
Flinders University, Adelaide, Australia
P. J. Sloane
IZA, Bonn, Germany
128 P. J. Sloane and M. K. Jones
grounds of gender, racial or ethnic origin or belief, age or sexual orientation, as

well as disability. Yet, there is reason to believe that the degree of disadvantage is
more severe for a substantial number of disabled individuals compared to any of
the other groups including, in particular, on the basis of non-participation in the
labour market and levels of family income (see Eurostat 2001).
Disability poses a number of problems for the economist in terms of analysis.
It takes several forms and varies considerably in terms of its severity. Unlike the
case of most other groups (age also being an exception) we cannot assume that
there are no negative effects on productivity. Certain individuals may be born with
a disability, while others may suffer from its onset at a later age and the causes
may include the effects of the working environment. There are particular problems
of definition and measurement, since the probability of someone reporting dis-
ability may depend on the nature of the available support mechanisms and the
generosity of transfer payments. As the foreword to an OECD Report (2003)
points out, disability policy faces ‘‘two twin but potentially contradictory goals’’
(page 3). One goal is to minimise the possibility that the disabled are excluded by
ensuring that as many of the disabled as possible are able to participate in the
labour market. The second goal is to ensure that the disabled have income pro-
tection, so that their standard of living is not reduced too dramatically if they are
unable to work. The OECD Report suggests that the problem of attempting to
reconcile these two goals has yet to be satisfactorily resolved.
In this paper we first present some facts on the incidence of disability in various
European countries. We then examine a number of measurement problems in
analysing disability. Next, using the UK example we show how the distinction
between work-limited and non-work-limited disability can be used in empirical
work to cast light on a number of issues. Finally, we consider alternative policies
for achieving greater social inclusion for disabled workers.
7.2 The Facts
One might expect that the incidence of disability would be similar in countries
with similar health status among their inhabitants. Yet this does not appear to be
the case as illustrated in the figures in Table 7.1. These figures are derived from an
ad hoc module of the Labour Force Survey conducted in 2002 (see Dupré and
Karjalainen 2003). Respondents aged 16–64 were asked an identical question,
namely whether they had a longstanding health problem or disability lasting for six
months or more or expected to last six months or more. One in six individuals
across the European Union as a whole (15.7%) stated that they did have a long
term health problem or disability defined in this way and 78% of those who
reported severe disability were outside the labour force compared to only 27% of
those without any long term health problem or disability. Dupré and Karjalainen
(2003) document several commonalities across countries. The incidence of dis-
ability is much higher for those with low education and rises with age in all
7 Disability and Social Exclusion 129
Table 7.1 Percentage High Low

incidence of disability among
the adult population (16–64) Finland 32.2 Austria 12.8
in 2002—25 countries UK 27.2 Cyprus 12.2
Netherlands 25.4 Luxembourg 11.7
France 24.6 Hungary 11.3
Estonia 23.7 Germany 11.2
Czech Republic 20.2 Ireland 11.0
Portugal 20.1 Greece 10.3
Sweden 19.9 Spain 8.7
Denmark 19.9 Malta 8.5
Slovenia 19.5 Lithuania 8.4
Belgium 18.4 Slovakia 8.2
Norway 16.4 Italy 6.6
Romania 5.8
Source: EU Labour Force Survey Ad Hoc Module, 2002,
adapted from Dupré and Karjalainen (2003). High (low) refers to
countries above (below) the unweighted EU average
countries. For example, in the EU 15 countries 19.0% of those educated to ISCED

0–2 are disabled, compared to 15.6% with ISCED 3 and 12.1% of those with
ISCED 4–6.1 Using these data they are also able to identify the cause and type of
the disability. Overall, only 16.9% of the sample had such a condition since birth,
and for only 18.4% was the cause work-related. The most common forms of
disability were musculoskeletal problems, especially with the back or neck legs or
feet, followed by heart, blood pressure and circulation problems. However, in a
number of countries mental illness has become an increasingly important type of
disability, especially when considering disability benefit claimants (see OECD
2006, 2007, 2008). In Finland, Denmark and the Netherlands it is now more
important than muscular-skeletal problems in terms of inflow on to disability
benefits among young and prime age individuals, and overall it accounts for over
40% of the total inflow (OECD 2006). In the UK, too, the prevalence of mental
illness has increased sharply, reaching 40% of all disability benefit recipients by
2006 (OECD 2007). Consistent with this, 22.5% of those with mental health
problems were in employment in the UK in 2002, or less than half the rate for
those with muscular-skeletal conditions. The incidence of mental health problems
has also increased in Australia and the Netherlands and to a lesser extent in
Norway and Poland (OECD 2006, 2007, 2008).
Despite these commonalities incidence varies dramatically across countries and
appears generally to be higher in Northern Europe than in Southern Europe. This
may reflect the relative generosity of welfare payments in the former relative to the
latter countries. In countries such as Finland, Luxembourg and Spain disability
1
Further, previous analysis, has shown that education is a particularly important determinant of
labour force participation among the disabled. See later discussion for more details.
Table 7.2 Employment rate by the severity of disability (where available), percentage of 20–64
population, late 1990s
Disabled Non-disabled 5
4 Ratio of 1–4
1 All 2 Severe 3 Moderate
Australia 41.9 31.4 46.9 76.6 54.7
Austria 43.4 23.9 50.2 71.8 60.4
Belgium 33.5 21.1 40.0 61.7 54.3
Canada 56.3 N.A. N.A. 78.4 71.8
Denmark 48.2 23.3 55.1 79.4 60.7
France 47.9 36.4 55.5 66.6 71.9
Germany 46.1 27.0 52.9 69.0 66.8
Italy 32.1 19.4 37.9 53.8 60.0
Korea 45.9 13.4 51.5 61.7 74.4
Mexico 47.2 N.A. N.A. 61.1 77.3
Netherlands 39.9 26.5 46.4 67.0 60.0
Norway 61.7 N.A. N.A. 85.8 71.9
Poland 20.8 N.A. N.A. 71.2 29.2
Portugal 43.9 27.6 55.3 74.0 59.3
Spain 22.1 15.1 26.5 54.2 40.8
Sweden 52.6 33.8 69.0 75.8 69.4
Switzerland 62.2 N.A. N.A. 79.1 78.6
UK 38.9 19.3 46.8 73.9 52.6
US 48.6 26.4 58.8 83.9 57.9
OECD (19) 43.9 N.A. N.A. 70.8 62.0
Source: Adapted from Table 3.3, Transforming Disability into Ability: Policies to Promote Work
and Income Security for Disabled People, OECD 2003
benefits tend to be used as a form of early retirement, so a high proportion of the

disabled are over 55 (OECD 2007, 2008). Norway has one of the highest pro-
portions of workers on disability benefits in the OECD and most policies are
focused on benefits rather than work inclusion strategies (OECD 2006). There are,
however, some anomalies in the case of neighbouring countries. Thus, while
disability incidence in the UK is 27.2% in Ireland it is only 11.0%, and in Portugal
incidence is 20.1% compared to only 8.7% in Spain. This raises the question of the
relationship between disability incidence and labour force participation. If low
incidence reflects setting a high standard for qualifying as disabled, this should
impact negatively on labour force participation among those recorded as disabled,
as there will be fewer individuals with moderate disabilities who find it easy to
participate. The reverse may be true for countries with a low threshold for dis-
ability. However, if the threshold for self-reporting disability is related to the
standards set to qualify for out of work disability benefits then a low threshold for
disability may be associated with fewer incentives to participate. Hence in this
case the outcome is indeterminate.
In Table 7.2 employment rates are provided by degree of severity of disability
relative to the non-disabled for 19 OECD countries. In all countries the probability
of employment is much higher for the moderately disabled relatively to the

severely disabled, though we do not know the extent to which the scales of these
correspond across countries. We must also allow for the fact that employment rates
for the non-disabled vary substantially across countries. Ignoring Poland, which is
an outlier, the ratio of employment rates between disabled and non-disabled
groups (presented in column 5) vary from 40.8% in Spain to 78.6% in Switzerland.
Thus, the Spanish example is consistent with a high threshold for defining dis-
ability being associated with a low employment rate. We can in general conclude
that in all countries the employment rate for the disabled is substantially lower
than that of the non-disabled.
The above table does not control for differences in hours of work between the
disabled employees and non-disabled employees. According to Eurostat (2001) in
EU14 19.4% of the severely disabled work 30 h or less compared to 14.9% of the
moderately disabled and 11.1% of the non-disabled. In part this will be influenced
by the fact that for some of the disabled their disability affects the amount of work
they can do.
There is abundant evidence that the disabled suffer from low incomes relative to
the non-disabled. First, there is a body of evidence which shows that, all else
constant, the disabled earn less when in work compared to the non-disabled
(DeLeire 2001; Jones et al. 2006). However, as noted above, the disabled also have
a lower propensity to work and a tendency to work fewer hours. Further OECD
(2003) reports that the total personal income of unemployed disabled persons is on
average only half of that of disabled people in employment. Table 7.3 compares
the average income of working age people with a disability with that of the income
of the working age population or of the non-disabled, according to the availability
of the data, for a number of countries, where income data are available. While
some of the definitions vary between countries making cross country comparisons
problematic, in every case the incomes of disabled individuals are consistently
lower than those without a disability.
Further insights can be obtained by analysing longitudinal data. Thus, Bardesi,
Jenkins and Rigg (2000) show that most of the disadvantage suffered by the
disabled can be accounted for by the low economic status of those who become
disabled. Using the BHPS 1991–1998 they show that the income of working age
men before the onset of a disability is just 10% higher than working age men who
already have a disability. Though the post disability gross income of disabled
working age men is 20% lower than their non-disabled equivalents their actual
reduction in net income is only 8%, cushioned as it is by pension benefits and tax
reductions. In the case of Germany, Lechner and Vasquez-Alvarez (2009) utilise
the German Socio-Economic Panel 1984–2002 to examine the effects of becoming
disabled on labour market outcomes. They find no significant evidence of reduc-
tions in income or increases in unemployment due to disability onset which they
attribute to the effectiveness of the German social security system.
It is suggested, however, that disability onset is associated with additional costs,
with the implication that even with the same level of income as the non-disabled
they would have a lower standard of living. Thus, one study found that without
Table 7.3 Relative income of working age population with a disability, circa 2005
Country Source Definition Date Percentage
Norway OECD Disposable income per equivalent person relative to 2004 91
Poland (2006) the non-disabled 2004 83
Switzerland 2002 90
Finland OECD Disposable income per equivalent person relative to 2005 91
Denmark (2008) the entire working age population 88
Ireland 71
NetherlandsOECD Disposable household income relative to the entire 2004 87
(2008) working age population
Luxembourg OECD Disposable household income per equivalent 2004 89
Spain (2007) person relative to the non-disabled 86
UK 73
Australia Gross household income per equivalent person 2003 65
relative to the non-disabled
Source: OECD 2006, 2007 and 2008
Notes: All figures refer to individuals of working age
using an equivalence scale 23% of households in the UK with disabled household

members had less than 60% of the median income, but when adjustments were
made for additional expenditure requirements associated with disability, such as
transportation and medical services, this figure rose to over 47% (see Braithwaite
and Mont 2008).
7.3 The Measurement Problem
The above suggests that there may be differences in the extent to which individuals
with a given degree of health problems are likely to report themselves as disabled
in different countries. The first question is to establish what is meant by the term
disability. There is no single definition. As Thornton and Lunt (1997) point out
definitions vary from one country to another and may be formulated for specific
purposes such as
• to determine who will benefit from national policies towards the disabled
• to outline the characteristics of a group with rights under the law (e.g. the right
not to be discriminated against)
• to define the target group for particular policy initiatives (such as who will count
towards meeting a quota, where this applies)
• to determine individual eligibility for specific services or measures (such as
qualification for sheltered employment).
Whilst a common definition could apply to all of these this is not necessarily
always the case and this in itself may influence answers to common survey
questions. OECD (2003) reports that many of those who report themselves as
disabled do not receive any disability benefits, while many of those on disability
benefits do not report themselves as disabled. Further, many of those classifying

themselves as severely disabled and who do not work receive no benefits.2 This
could occur through lack of fulfilment of insurance requirements or failing a
household means test.
The two requirements for a satisfactory definition of disability are that the
condition should not be short-term and it should be more than a minor ailment.
Thus, in the case of the UK, respondents to the Labour Force Survey are asked
first; ‘Do you have any health problems or disabilities that you expect will last
more than one year?’; second, ‘Does this health problem affect the kind of paid
work you might do?’ and third, ‘Does this health problem affect the amount of paid
work you might do?’ According to the UK Labour Force Survey 2009, of those
who had a disability just over half said it affected the kind of work they could do
and 43% said that their disability affected the amount of work they could do, and
this was slightly higher for women than for men. If positive answers are given to
the first and either the second or third question one can classify an individual as
work-limited disabled. The large majority of this group are limited in both the
amount and kind of work they can do. This enables one to distinguish between the
work-limited disabled, the non-work-limited disabled and the non-disabled and
this three-way split turns out to be particularly informative as is shown below.
However, there are some caveats. The precise nature of and the order in which
questions are asked influence the responses. For example, after such changes in the
1997 UK LFS, 24% fewer respondents reported a long-term disability which
affected the kind of work they might do, and of those responding positively a
greater proportion were economically inactive (Cousins et al. 1998).
The Household Income and Labour Dynamics in Australia (HILDA) Survey is
particularly rich in its coverage of disability.3 Further, the panel nature of these
data has the advantage of facilitating analysis of transitions in self-reported dis-
ability status. Using the first five waves of HILDA Oguzoglu (2007) finds that 71%
of men and 73% of women always report themselves as non-disabled, whereas 8%
of men and 5.5% of women always report themselves as disabled. Roughly 18% of
both men and women exhibit an irregular pattern of limitation. Thus, for many,
disability is a temporary phenomenon.
A further consideration on which data are often lacking in Europe is age of
onset of disability. Mavromaras et al. (2007), using the HILDA data, suggest that
2
According to Eurostat (2001) in the mid 1990s sickness and disability benefits covered 48% of
those reporting a severe disability. In Belgium, Spain and Denmark such benefits covered more
than half this group but the proportion in Greece, Italy, Luxembourg, Austria and Portugal were
in the range 27–36%, while the UK had the maximum coverage of 65%.
3
The HILDA survey asks ‘Do you have a long-term health condition, impairment or disability
that restricts you in your everyday activities, and has lasted or is likely to last, for 6 months or
more?’. Respondents are then asked to list which of 17 types of disability affects them. They are
also asked whether these conditions limit the type or amount of work they can do and to pick a
number between 0 and 10 to indicate how much their conditions limit the amount of work they
can do.
mature age onset is associated with the worst labour market outcomes. In partic-
ular more than half of males and more than 60% of females who develop disability
in mature age do not participate further in the labour market. This may be because
individuals adapt to their disabilities better when they are younger. Using the same
data, Oguzoglu (2009) finds that recovery from a severe limitations shock (in
terms of returning to the labour market) takes an average of 5 years for a woman
and 3 years for a man.
There is, however, a wider measurement error problem as individuals may use
different response scales to self-report disabilities. As we have seen the fraction of
workers reporting disability is very different across countries with similar eco-
nomic (and health) development. Kapteyn, Smith and van Soest (2007) use
‘‘vignette’’ questions on internet surveys in the US and Netherlands, and ask
respondents to evaluate on the same scale as they normally use the severity of
work disability problems in hypothetical scenarios. The answers imply that work
disability is almost 20% points higher among those aged 45–54 in the Netherlands
than the US, the two countries compared in the study, despite evidence from
elsewhere that the Dutch are healthier than Americans. In fact this study suggests
that about half the difference in reported rates of disability can be attributed to
response scale differences. It seems likely that different response scales are an
important cause of the differences in reported incidence of disability across
European countries, though Datta Gupta, Kristensen and Pozzoli (2009) have
questioned the assumption of response consistency which forms the basis of this
approach.
Much of the previous literature has been concerned with the problem of jus-
tification bias or the possibility that some individuals may claim to be disabled in
order to justify their inferior labour market status or non-participation in the labour
market. The empirical evidence on the extent to which this is common is mixed
and may be partly overcome by using specific health measures, which, while also
self reported may be less prone to such biases. There is a further complicating
factor when considering work-limiting disability in that those who are out of the
labour market may consider a wider range of occupations when making this
judgement than those who say they are work-limited, but who are in the labour
market.
Another form of endogeneity arises from the fact that as well as poor health
having an effect on the propensity to work, some work situations may themselves
cause poor health. This suggests that a simultaneous equations model (or IV
approach) may be required in order to obtain efficient estimates of the impact of
health on labour supply. There is again disagreement in the literature about the
importance of this form of endogeneity and as noted above less than 20% of
disability appears to be work related. However, using data from HILDA, Cai
(2010) shows that while good health has a positive and significant effect on labour
force participation both in the case of men and women, employment has a general
negative effect on men’s health and a positive effect on women’s health. This
implies the justification hypothesis can be rejected for men but not for women.
Notwithstanding the difficulties involved when using international data, several

studies have used the European Community Household Panel Survey (ECHP)
1994–2001, which contains two binary measures of health/disability. The first asks
respondents; ‘Do you have any chronic physical or mental health problems, illness
or disability?’ A second question asks; ‘Are you hampered in your daily activities
by this physical or mental health problem, illness or disability?’ They are then
asked if this is severely, to some extent, or not at all. However, we do not know
whether or not the problem is long term or whether it has an impact on work
activities. Disappointingly there are no direct questions on the timing of disability
onset but individuals who become disabled during the panel can be identified and
this is important for identifying the causal impact of disability on labour market
outcomes. Despite these limitations Hernandez-Quevedo, Jones and Rice (2007)
use ECHP data to test for individual heterogeneity and state dependence in dis-
ability incidence. Heterogeneity appears to account for half of the unexplained
variation in the presence of any health limitations and the estimate of state
dependence (or the effect of previous disability on current status) is large and
significant in all countries. A second paper to use the same data-set is Hagan, Jones
and Rice (2009). They utilise a discrete time proportional hazards model to
examine the relationship between health and retirement and argue that since they
use self reported measures of health recorded prior to the exit decision this should
reduce the problem of justification bias. They find marked cross country hetero-
geneity in the magnitude of responses to health shocks. Ireland, Portugal and Spain
are the countries where health shocks have the greatest impact. Ireland has a
generous early retirement benefit scheme and Portugal the highest ratio of dis-
ability pension related expenditure to old age pension expenditure. However, the
magnitude of the effect in Spain is surprising given the low incidence of disability
there, but is possibly explained by the use of disability benefits as a form of early
retirement as discussed earlier.
7.4 Disability and Labour Market Outcomes: A UK Example
The above discussion suggests that comparative analyses across countries are
fraught with difficulties because measures of incidence may be non-comparable.
For this reason much of the literature focuses on a single country and our dis-
cussion is restricted to the example of the UK. Differences between the disabled
and non-disabled, as we have seen, are substantial in relation to employment rates,
but smaller in terms of wage rates when in employment. Both gaps may be due to
both observable (factors such as education) and unobservable (factors such as
work commitment) characteristics in addition to the presence or otherwise of
disability. In examining wage differences it also needs to be recognised that there
is a potential for selection bias, as those in the labour market may not be a random
subset of the total population.
First, in considering whether there is discrimination against the disabled

allowance has to be made for the possibility that the disabled are less productive
than the non-disabled, though this may vary according to the severity and type of
disability and will likely also vary with job demands. Following DeLeire (2001)
and Jones et al. (2006) it is possible to make use of the distinction between work-
limited and non-work-limited disability to cast light on this, using a conventional
decomposition analysis. If we assume that the disabled who report no work lim-
itations do not have lower productivity as a consequence of their impairment
relative to the non-disabled, we can interpret the unexplained residual in a Oaxaca-
type decomposition as an estimate of discrimination. Further, if we then assume
that the degree of discrimination is identical for the two groups of disabled
workers, the unexplained residual for the work-limited disabled can then be
regarded as an estimate of the lower productivity of the work-limited disabled
relative to the non-disabled, which is not captured by the measured personal
characteristics included in the empirical model. The fact that outcomes for the
non-work-limited disabled approximate those of the non-disabled rather than
the work-limited disabled suggests that the productivity effect is important. The
unexplained component between the non-work-limited and non-disabled, that is,
the measure of discrimination is found to be very small. These findings are in line
with those of DeLeire for the US. However, a potential problem here is that the
characteristics of the two groups may differ, such that one group is clearly iden-
tifiable from the other and possibly more subject to discrimination. Indeed, there
are significant and important differences in the distribution of types of disabilities
between work-limiting and non-work-limiting disability (Jones et al. 2006).4
One of the other interesting features to emerge from the analysis of Jones et al.
(2006) is the importance of education. In Table 7.4 we present the results of
highest educational qualification on employment and earnings. Possessing higher
level educational qualifications has a highly significant positive impact on the
likelihood of being in employment for all groups, though less obviously so for the
more highly educated males within the non-work-limited group. Similarly it has a
highly significant positive effect on earnings, with the exception of the less well-
educated men and women within the non-work-limited group. More revealing are
the marginal effects in the employment probits in Table 7.5. Education has the
strongest effect of any of the explanatory variables on the likelihood of being in
employment and the effect is much stronger for the work-limited disabled. Thus, a
4
When specifications are estimated with controls for the type of health for both disabled groups
all variables turn out to be positively significant compared to those with mental health problems-
the omitted category. Mental health is, therefore, more problematical, both for entering the labour
market and for obtaining earnings comparable to those of other workers. This distinction has
recently been emphasised by Longhi, Nicoletti and Platt (2010) who extend the work of DeLeire
(2001) and Jones et al. (2006) by redefining productivity differences to incorporate co-disabilities
and sickness absence and splitting the disabled into those with physical and mental disabilities.
Using data on men in the UK LFS over the period 1997-2008 their quantile regression results
show a residual wage gap, or discrimination, only for those with mental health problems and this
only at the top of the wage distribution.
Table 7.4 The influence of education on employment and earnings by disability status, UK LFS
2003
Work-limited disabled Non-work-limited disabled Non-disabled
Earnings Employ Earnings Employ Earnings Employ
Males
Degree 0.343*** 0.946*** 0.374*** 0.170* 0.399*** 0.433***
(6.61) (14.09) (12.11) (1.89) (27.63) (11.68)
Other higher 0.200*** 0.860*** 0.166*** 0.013 0.203*** 0.452***
education
(3.89) (11.49) (5.20) (0.13) (13.44) (9.58)
A level 0.138*** 0.587*** 0.094*** 0.323*** 0.135*** 0.437***
(3.57) (12.32) (3.68) (4.22) (10.77) (13.19)
O level 0.120*** 0.620*** 0.039 0.218** 0.066*** 0.481***
(2.88) (10.96) (1.42) (2.49) (5.10) (13.66)
Other 0.103*** 0.421*** 0.020 0.310*** 0.069*** 0.434***
(2.70) (7.77) (0.70) (3.39) (5.11) (11.27)
Lambda 0.010 0.041 0.029
(0.18) (0.74) (1.16)
Observations 2,409 7,780 3,899 4,834 21,389 27,302
Females
Degree 0.483*** 1.030*** 0.338*** 0.722*** 0.327*** 0.720***
(9.25) (15.27) (10.83) (9.19) (24.06) (23.41)
Other higher 0.310*** 0.960*** 0.210*** 0.739*** 0.184*** 0.842***
education
(6.44) (15.33) (7.20) (9.12) (13.74) (23.91)
A level 0.207*** 0.763*** 0.047* 0.638*** 0.094*** 0.544***
(4.99) (14.10) (1.83) (9.17) (8.23) (19.24)
O level 0.171*** 0.664*** 0.042* 0.640*** 0.034*** 0.561***
(4.62) (14.02) (1.77) (10.25) (3.20) (21.72)
Other 0.137*** 0.538*** 0.017 0.422*** 0.030*** 0.402***
(3.78) (10.38) (0.73) (6.24) (2.65) (13.69)
Lambda 0.156*** -0.022 -0.058***
(3.00) (0.57) (3.83)
Observations 2,478 7,938 3,764 5,309 22,627 33,023
Source: Adaptation of Tables 2, 3, 4 and 5 from Jones et al. (2006). Wage equations also include
controls for region, occupation, industry, absence, ethnicity, marriage, experience, experience
squared, small firms, part-time employment, tenure and tenure squared, sector, overtime and
housing tenure. Employment probit model also includes controls for region, ethnicity, marriage,
housing tenure, age and age squared, presence of dependent children in household and of another
earner.
*** **
, and * denote significance of the coefficients at the 1, 5 and 10% level respectively
work-limited disabled man with a degree is 35% points more likely to be in

employment than his equivalent without any qualifications, while this effect is only
9% points for a non-disabled male.
The usefulness of the distinction between work-limited and non-work-limited
disability is also shown in studies of part time and self employment. Thus, Jones
(2007) notes that disabled workers in the UK are much more likely to work
Table 7.5 Marginal effects associated with the influence of education on employment by dis-
ability status, UK LFS 2003
Work-limited disabled Non-work-limited disabled Non-disabled
Males
Degree 0.353*** 0.034** 0.090***
(13.80) (2.02) (13.47)
Other higher education 0.322*** 0.003 0.087***
(11.08) (0.13) (12.13)
A level 0.203*** 0.064*** 0.094***
(11.86) (4.49) (14.51)
O level 0.223*** 0.042*** 0.098***
(10.34) (2.73) (16.12)
Other 0.147*** 0.057*** 0.087***
(7.37) (3.91) (13.67)
Females
Degree 0.388*** 0.189*** 0.205***
(15.48) (11.96) (29.18)
Other higher education 0.361*** 0.189*** 0.221***
(15.24) (12.28) (33.81)
A level 0.281*** 0.176*** 0.164***
(13.54) (11.08) (22.09)
0.238*** 0.185*** 0.175***
O level (13.52) (11.59) (23.89)
Other 0.193*** 0.123*** 0.124***
(9.87) (7.05) (15.35)
Marginal effects (evaluated at the sample means of the data) accompany employment probit
models presented in Jones et al. (2006) Tables 2 and 3 respectively. Z statistics reported in
parenthesis.
*** **
, and * denote significance of the marginal effects at the 1, 5 and 10% level
part-time than the non-disabled, but more particularly the unexplained disability
gap in part-time employment for work-limited disabled workers is not due to
employer discrimination, but rather reflects differences in the preferences for part-
time employment among this group. Part-time employment affected 11.3% of
work-limited disabled men, compared to 5.0% of the non-disabled and 5.25% of
the non-work-limited disabled. For women the figures were 49.4, 39.2 and 39.5%
respectively. Similarly, Jones and Latreille (forthcoming) find for the UK that
those whose impairment is not work-limiting have self employment rates which
are very similar to those of the non-disabled, while self employment rates among
the work-limited disabled are significantly higher. They report for men that 21.3%
of work-limited disabled, compared to 16.6% of the non-work-limited disabled
and 17.4% of the non-disabled are self employed. For women the figures are 9.3,
6.3 and 7.3% respectively. Similar results are reported by Pagan (2009) for various
European countries, using the European Community Household Panel (ECHP)
1995–2001. For almost all European countries analysed, self-employment (as a
percentage of total employment) is higher for disabled individuals compared with
non-disabled individuals. The greatest differentials are found in Southern

European countries such as Greece and Portugal.
A further consideration for those disabled workers is whether they are able to
obtain employment which utilises their skills and experience, that is, a good
‘match’. Mismatch may result not simply from discrimination, but from reduced
productivity amongst the disabled narrowing job choices. In addition, there may be
spatial constraints on job search as a result of transport limitations or hours or
accommodation constraints. Regardless of the source of the constraint on
employment opportunities this increases the risk that a disabled individual will
accept mismatched employment. However, despite this, the earlier literature on
skill mismatch has largely ignored the issue of disability. Jones and Sloane (2009)
attempt to remedy this omission by making use of the UK Workplace Employment
Relations Survey 2004, which contains questions both on disability, whether work-
limited or not, and on self-assessed skill mismatch measured on a five point scale.
Descriptive data show that the disabled and particularly the work-limited disabled
are significantly more likely to say they are over-skilled than the non-disabled.
This is confirmed in a multi-nomial logit model of the determinants of skill
mismatch in which both the non-work-limited and work-limited disabled are found
to be more likely to be mismatched (with respect to both under-skilling and over-
skilling), with marginal effects stronger for the work-limited disabled.
In Table 7.6 (which is adapted from Jones and Sloane 2009) we consider the
implications of skill mismatch for hourly earnings for each of the three disability
groups. Both specifications show that in terms of hourly earnings the non-work-
limited disabled are not significantly different from those of the non-disabled.
However, the work-limited disabled earn nearly 6% less than the non-disabled.
In addition there is a penalty to over-skilling of over 3%, but no penalty to being
under-skilled. When separate equations are run for the three groups the pay penalty
to being over-skilled ranges from just over 2% for the non-disabled, to 6% for the
non-work-limited disabled and over 10% for the work-limited disabled.
Jones and Sloane (2009) also consider the effects of skill mismatch on the job
satisfaction of each group in terms of seven facets of satisfaction and a constructed
index of satisfaction. In each of these cases the job satisfaction of the work-limited
disabled is significantly lower than that of the non-disabled in terms of the
descriptive statistics, but in only three cases is this so for the non-work-limited
disabled. (One factor which we do not consider here is the possibility that
increased workplace disability diversity is associated with lower employee well-
being among those with no reported disability, see Haile 2009). Table 7.7 presents
some key results from the ordered probit and random effects ordered probit models
for the determinants of job satisfaction estimated by Jones and Sloane (2009).
In both specifications the disabled have significantly lower job satisfaction than the
non-disabled, as do those who are either under-or over-skilled. Finally noting that
the disabled appear to have less control over their work than the non-disabled
Jones and Sloane (2009) construct an index of worker control which combines the
ability to influence tasks, the pace of work, how the individual does the work, the
order of work and the time of arrival and finish of work. This index was found to
Table 7.6 Determinants of hourly earnings in Britain, WERS 2004

OLS Random effects GLS
All All Non-disabled Non-work-limited Work-limited
disabled disabled
Non-work-limited -0.000 0.001
disabled (0.01) (0.16)
Work-limited -0.057*** -0.047***
disabled (4.75) (4.18)
Underskill 0.006 -0.004 0.000 -0.038 -0.002
(0.45) (0.30) (0.03) (0.80) (0.04)
Overskill -0.033*** -0.026*** -0.022*** -0.060*** -0.104***
(6.32) (5.25) (4.19) (2.96) (4.01)
Observations 18,156 18,156 15,988 1,343 825
Source: Adapted from Table 5 of Jones and Sloane (2009). Specifications with random effects
take into account that there are individuals employed within the same workplace. Wage equation
also includes controls for gender, tenure, qualifications, part-time employment, union member-
ship, marital status, ethnicity, workplace size, sector, an index of worker control, age, temporary
contract, presence of children and a full set of regional, occupational and industry dummies.
*** **
, and * denote significance at the 1, 5 and 10% level
have a negative impact on the probability of being mismatched, and a positive

effect on both wages and job satisfaction. Therefore, they argue that giving
workers greater control over their own work can have considerable benefits.
7.5 Policy Issues
7.5.1 Income Support
The number of individuals on disability benefits has been increasing in a number

of countries. Thus, in the European Union there were approximately 26 million
claimants in 2005, equivalent to 5% of the employed labour force, which
amounted to an increase of 5 million over the start of the decade (Benitez-Silva
et al. 2010). In the US, Autor and Duggan (2003) note that the share of non-elderly
adults receiving Social Security Disability Insurance rose by 60% between 1984
and 2001. They attribute this to reduced screening stringency, declining demand
for less skilled workers and an increase in the earnings replacement ratio as a
consequence of increased earnings dispersion. In turn this led to a one half percent
reduction in the unemployment rates of non-elderly adults. Gruber (2000) utilises
the fact that in Canada there are separate arrangements for disability insurance in
Quebec and the rest of Canada. The latter programme increased the replacement
rate of such benefits by 36% in 1987, whilst benefits remained constant in Quebec.
He uses this policy difference to estimate the elasticity of labour force non-par-
ticipation with respect to disability insurance benefits (using a difference-in-
Table 7.7 Determinants of job satisfaction in Britain, WERS 2004

Ordered Random effects ordered probit model
probit
All All Non-disabled Non-work-limiting Work-limiting
disabled disabled
Non-work-limited -0.087*** -0.076**
disabled (2.92) (2.47)
Work-limited -0.216*** -0.214***
disabled (5.77) (5.58)
(1.73) (1.22) (0.76) (1.78) (0.24)
Underskilled -0.473*** -0.462*** -0.442*** -0.538*** -0.717***
(12.20) (11.63) (10.30) (3.68) (4.17)
Overskilled -0.300*** -0.300*** -0.309*** -0.284*** -0.230***
(18.46) (17.98) (17.37) (4.50) (2.75)
Control index 0.134*** 0.140*** 0.139*** 0.146*** 0.144***
(56.41) (56.54) (52.22) (15.37) (11.67)
Observations 18,028 18,028 15,894 1,318 816
Source: Adapted from Table 6 of Jones and Sloane (2009). Specifications with random effects
take into account that there are individuals employed within the same workplace. Equation also
includes controls for gender, tenure, qualifications, part-time employment, union membership,
marital status, ethnicity, workplace size, sector, age, temporary contract and a full set of regional,
occupational and industry dummies.
*** **
, and * denote significance at the 1, 5 and 10% level
difference approach) and finds this to be in the range 0.28–0.36. In Europe similar
trends have been observed. Thus, in the UK the number of working age individuals
claiming disability benefits rose from under 1 million in the mid 1970s to 2.7
million by 2003 (Beatty and Fothergill 2004). Within this figure the proportion of
females raised from one-fifth to two-fifths. McVicar (2008) suggests that the
explanations are consistent with the North American literature. Three recent
papers have emphasised that disability insurance and unemployment insurance are
substitutes. Bratsberg, Fevang and Roed (2010) observe that countries with low
unemployment often have high rates of disability and this is particularly the case in
Northern Europe. Rates of disability in Denmark, Finland, Norway, Sweden and
the Netherlands are within the top six out of 28 OECD countries and each has low
rates of unemployment relative to the OECD average. They note that in Norway
the fraction of the working age population which receives health related social
security benefits rose from 15.2 to 20.4% between 1993 and 2006, and the ratio of
permanently disabled to the number of unemployed almost quadrupled at a time
when the proportion of the adult population reporting themselves as in good health
was rising. Koning and van Vuuren (2010) estimate that the degree of substitution
between disability insurance and unemployment in the Netherlands over the period
1993–2002 is such that about one quarter of disability insurance enrolments
constitute hidden unemployment. Finally, Benitez-Silva, Disney and Jimenez-
Martin (2010) report that disability insurance programmes have been used to
cushion recessions across most OECD countries. Variations in regional unem-
ployment rates explain about 12% of the variation in self reported health problems
and the elasticity of disability benefit claims to the local unemployment rate is
0.16–0.17. That is, a doubling of the unemployment rate is associated with
16–17% more claimants to disability benefits. Thus, the measurement of disability
is not independent of policies impinging on those who are, or who are thought to
be, disabled.5
In the light of these findings it seems that ensuring as many of the disabled as
possible are in employment is a more appropriate policy than attempting to
increase income support which may be a much more expensive strategy and one
which is less well aligned in terms of social inclusion. As Burkhauser and Daly
(2002) note, disability income transfer programmes have to overcome potential
problems of moral hazard and work incentives. This is exacerbated by the fact that
disability eligibility is not well defined.
7.5.2 Quotas
Historically mandatory employment quotas have been widely used to assist the
disabled to obtain gainful employment. Wuellrich (2010) suggests that a third of
all OECD countries use them, with quotas ranging from 2% of employees in Spain
to 7% in Italy. In cases of non-compliance employers may be required to pay a tax
on any unfilled places, ranging from 0.25 to 4% of the monthly payroll. However
the compliance rate is only 50% on average with a range of 25% in Spain to 67%
in France, where a quota system was promoted under a 1957 Act. Certain
employees may count more than once in reaching the target depending on age,
severity or type of disability. In Austria those employing 25 or more are required
to hire one registered disabled person for every 25 non-disabled employees.
Employers are required to contribute to a levy fund which is used to reward
employers who exceed the quota. In Germany those employing 16 or more are
obliged to ensure that at least 6% of the workforce consists of severely disabled
individuals, with very severe cases counting three times the norm. In Greece those
employing 50 or more must have at least 7% of their workforce disabled, but
effectiveness is limited by the fact that over 50% of the workforce is self employed
and over 80% of enterprises have less than ten employees. Until comparatively
recently there were no penalties for non-compliance. Italy has had a quota system
since 1947 with different quotas for separate categories where more than 35 are
employed, but with exemptions such as those for people over 55. Ireland has a
public sector quota of 3%, while the Netherlands attempted to achieve a quota of
between 3 and 5% by voluntary means (for a discussion of all of the above and
eighteen countries in total see Thornton and Lunt 1997). In general it seems quotas
have been set too low to bite and in the main the law seems to be disregarded, but a
5
Much less attention has been paid to the possibility that individuals who are in fact disabled
may in fact not describe themselves as such for fear of being stigmatised. One effect of legislation
and other policy measures to assist the disabled may be to remove or reduce the stigma, so that
the recording of disability goes up.
further problem is how to define whether someone meets the quota, given the
definitional problems outlined above. One response to this would be to increase the
cost of non-compliance or increase the size of wage subsidies offered to employers
who take on disabled workers.6 Thus, Wuellrich (2010) examined a non-compli-
ance tax increase of 30% in Austria on firms not complying with the quota and
found this led to a 2.5% increase in the average number of disabled workers in
employment. Yet, quotas, even where they are implemented stringently appear to
be a blunt instrument for improving the employment prospects of disabled workers
since they may be set at too high or low a level. In the former case, some industries
may be less able to hire disabled workers than others, while in the latter case rising
proportions of disabled workers may render the quota redundant.
7.5.3 Sheltered Employment
Employment in sheltered work environments is used in most OECD countries to

provide work opportunities for disabled people. Visier (1998) provides informa-
tion on its incidence in Europe in the early 1990s, though the extent to which
incidence may have changed since then is not known. In this evidence the Neth-
erlands stands out as having the highest share of the economically active popu-
lation in sheltered employment, but this ratio is generally small. OECD (2006)
notes that often such work is designed to serve a therapeutic function rather than
achieve work task and responsibility functions. In France the quota employment
obligation on employers may be met through contracts with sheltered workshops.
In Italy there are over 300 sheltered workshops, but some of these involve no
payments to the disabled. Visier (1998) suggests that sheltered employment would
be more successful in integrating participants into normal jobs if working condi-
tions were more similar to those in the regular labour market. There are also
questions about the level of disability required to qualify for sheltered employment
and whether this should be permanent or temporary as in Norway. Subsidies paid
to employers of sheltered employment may require the implementation of rein-
tegration services. However, sheltered employment is unlikely to achieve the same
degree of social inclusion as normal employment.
7.5.4 Anti-Discrimination Legislation
Disability anti-discrimination legislation is a relatively recent development. It was

only in 2000 that the European Union issued a directive protecting the rights of
disabled people in the fields of employment and training, but this is leaves member
states with great discretion over how the mandates are implemented.
6
Wage subsidies may be offered to both employers and employees as in Austria, but employer
subsidies are more common.
Comprehensive legislation was passed in the US in 1990, Australia in 1992, the

UK in 1995 and Ireland in 2005. Such legislation generally requires employers to
make reasonable accommodations to remove any workplace disadvantages such as
modifying hours of work and physical features of the workplace. In principle this
attempts to more directly address the work-limiting nature of disability and the
heterogeneous nature of requirements highlighted above. However, as noted by
Acemoglu and Angrist (2001) these adjustments may have potential negative
effects on employers through the imposition of additional costs. It also raises
questions about who is covered and who is not. The more specific differences in
provisions between countries are outlined in Pillinger (2003). In Germany and
Spain for example, the anti-discrimination clause only applies to the severely
disabled, defined in percentage terms. In some countries the reasonable accom-
modation duty has not been included in national legislation (e.g. Estonia, Italy and
Poland). In other cases it is not clear whether failure to provide reasonable
accommodation is to be treated as a form of unlawful discrimination (e.g. France,
Hungary and Latvia), while in other cases it is not considered as such (e.g. Finland,
Germany, Luxembourg and Portugal). Further, the amount of compensation
offered to employees who have been found to be discriminated against varies
across countries. Studies of the effects of the legislation on the employment of the
disabled have been carried out in the US and the UK. In the US the results are
conflicting with several studies finding negative effects (such as Acemoglu and
Angrist 2001) and others insignificant effects (such as Hotchkiss 2004). In the UK,
Bell and Heitmueller (2009) are unable to find any positive effects from the
introduction of the Disability Discrimination Act (DDA). The extent to which this
legislation can lead to a substantial improvement in the relative position of the
disabled remains to be determined.
7.5.5 Employment Policy
More and better targeted employment services seem essential if one is to maximise
the employment potential of the disabled. A major reason for poor labour market
outcomes for the disabled is their low level of academic qualifications. Further,
OECD (2007) notes that in many countries the education gap between the disabled
and non-disabled is widening rather than narrowing. Raising the education qual-
ifications of the disabled should therefore, be a priority. In addition individual
vocational rehabilitation, training and employment support are required. The
OECD concludes that what is important is close contact between the job seeker
with a disability and the employment advisor and a proactive approach in relation
to the employer after a job has been found. The UK is cited as an example of good
practice in its Pathways to Work Programme. Here all new disability benefit
claimants are obliged to attend an initial work focused interview with a Personal
Advisor at their local Jobcentre Plus. There are normally five further interviews
with the same advisor at monthly intervals designed to overcome barriers to
employment and develop an action plan specifying what activities are to be

undertaken. For an evaluation see Dorsett (2008). He concludes that the policy was
successful in increasing employment in a cost effective manner and may have
reduced the extent to which individuals’ health conditions limited their ability to
engage in day-to-day activities. However, he counsels that greater priority needs to
be given to those suffering from mental illness.
In addition there is a need to encourage employees to hire, utilise effectively
and retain disabled employees. Hiring and retention of workers with disabilities
can be assisted by work subsidies, accommodation schemes and personalised
support from public employment services. As for labour utilisation, as noted
above, Jones and Sloane (2009) found the disabled (particularly those who were
work-limited) were significantly more likely to be skill mismatched than the non-
disabled. This suggests that employers should be encouraged both to increase the
discretion that disabled employees are given in the way they perform their job and
more formally to assess the capabilities of such workers.
7.6 Conclusion
In this paper we have reviewed, from a European perspective, the facts relating to
the incidence of disability, the considerable measurement problems in analysing
the phenomenon, and the various policies adopted in Europe to assist the disabled.
The extent to which individuals self-report disability varies considerably between
EU countries. In part, this may reflect differences in health and functional limi-
tations amongst the population but it is also a result of cultural norms and the
incentives generated by institutional and policy frameworks. Within the UK, a
country with a high prevalence of self-reported disability, we summarise evidence
of substantial labour market disadvantage in terms of participation, relative wages,
hours of work and skill mismatch for those whose disability is classified as work-
limiting. If the aim of policymakers is to enhance social inclusion through labour
market participation, then the important question is: what factors cause a disability
to be work-limiting? This, however, is a difficult question since it will reflect an
individual’s own experience, aspirations and perceptions, the social and policy
environment, as well as the fundamental interaction between functional limitations
and job demands.
We have reviewed five different types of policy which have been implemented
to assist the disabled. In the context of social inclusion, income support should not
be offered to those who are able to participate in the labour market, though where
to draw the line is likely to be problematical given the measurement issues and the
changing nature of the disability itself. Quotas seem to be potentially inefficient
and sit uneasily with equal opportunities policies. Sheltered employment is pro-
vided on a small scale in most countries and is unlikely to provide the same degree
of social inclusion as normal employment. Further, there is little evidence that
more recently introduced anti-discrimination legislation has provided major gains
for the disabled. This leaves us with individually targeted employment policies as
the most promising policies to help disabled individual retain and gain employ-
ment for which they are most suited.
A critical starting point, therefore, is identifying non-disabled individuals from
disabled individuals who are capable of work and those who are incapable of work
since the nature of support needs to differ considerably. However, fundamental in
ensuring the effectiveness of such policies is an awareness that disability reporting
and the reporting of a disability as work-limiting will, in part, depend on the
incentives generated by such a policy and its relationship to other related support.
In trying to resolve such a difficult issue, a number of considerations are important.
First, whatever the nature of the policy, it should be made clear who is eligible and
stringent assessments maintained to ensure the policy covers its target audience.
For the case of identifying work-ability this will require a comprehensive indi-
vidual assessment of capabilities and of potential job demands. Secondly, policies
need to be carefully structured and targeted to minimise the influence they have on
reporting the existence or extent of disability by providing support that is partic-
ularly beneficial for the target group. While few would argue against out of work
financial support for those with the most limiting of conditions, appropriate
incentives for employment should be generated for those who are able to work.
Key in this respect is the recognition that disabled individuals whose disability
limits their work may need support in work in order to maintain the incentive to
work for those who are able to do so.
Recent changes to disability benefits in the UK have moved in this direction.
For example, Incapacity Benefit, the main form of income support for those out of
work was replaced in 2008, for new entrants, by the Employment and Support
Allowance. A key element in this change is the focus on the ability to work. This
includes a medical ‘work capability’ assessment which evaluates the extent to
which the disability limits work activity. For those who are deemed as capable of
work, work-focused interviews and support are provided to help individuals regain
employment. As part of the assessment process considerable attention needs to be
focused on raising the educational qualifications of the disabled as this has a
critical role in improving the employability of this group. Recent work has shown
that the incidence of mental health problems has become a larger proportion of the
total incidence of disability and that this group has greater disadvantage in
accessing employment and benefitting from it. Individual employment support
may be able to reach these groups that require special consideration.
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Chapter 8
Civilian Disability Pensions
as an Antipoverty Policy Instrument?
A Spatial Analysis of Italian Provinces,
2003–2005
Massimiliano Agovino and Giuliana Parodi
Abstract The purpose of this paper is to investigate whether civilian disability

pensions have been used as an antipoverty measure in Italy. We applied a two-step
analysis to Italian provincial data for the years 2003–2005. We implemented a
classic panel analysis, followed by a two-step GMM (Generalised Method of
Moments) analysis in which we introduced the spatial variable.
The analysis shows that the number of civilian disability pensions is not related
to disabling disease, but it is related to the unemployment rate in some areas and to
the rate of poverty everywhere. These results robustly hold when the spatially
lagged dependent variable is introduced among the regressors. The spatial variable
allows us to take into account the local dimension and the possible social, his-
torical, and cultural links among provinces that go beyond administrative
boundaries. In discussing the results, we stress that the figures reflect the number
of civilian disability pensions granted, not those requested. Moreover, the national
legislation on the attribution of civilian disability pensions is administered locally;
therefore, its application may reflect degrees of discretionary interpretation.
We propose that there is room to interpret the use of civilian disability pensions as
an antipoverty policy instrument in areas characterised by economic difficulties.
However, we suggest that civilian disability pensions are particularly unsuited to
play the role of an assistance policy instrument; once granted, they are seldom
withdrawn despite possible changes in the financial situation of the recipient.
M. Agovino (&) G. Parodi

Università d’Annunzio di Chieti-Pescara,
Chieti, Pescara, Italy
e-mail: agovino.massimo@gmail.com
G. Parodi
e-mail: parodi@unich.it
150 M. Agovino and G. Parodi
Keywords Disability Pensions Models with panel data Spatial models

JEL Codes J14 I38 C33 C21
8.1 Introduction
The purpose of this paper is to investigate whether civilian disability pensions have
been used as an antipoverty measure in Italy. This analysis is performed using
provincial-level data. We introduce the concept of a local ‘‘market’’ for civilian
disability pensions, show the dual structure in the distribution of civilian disability
pensions between the north and the south of Italy, and we attempt to test a stylised
model that may explain it. We develop our analysis stressing the concept of a local
‘‘market’’ for civilian disability pensions. In Italy, the observed number of dis-
ability pensions corresponds to the number of accepted requests for civilian dis-
ability pensions. The set of national rules that dictates the attribution of civilian
disability pensions is administered locally by institutions such as provincial
medical committees and doctors operating at nearby medical centres. Therefore,
the criteria chosen locally in applying the national rules might take into account
characteristics of local labour markets, thus generating an uneven distribution of
the number of recipients of civilian disability pensions.
The literature addressing the growing number of individuals of working age
receiving disability pensions has not yet investigated the reasons for the uneven
spatial distribution of these pensions. For example, there is a high number of
disability pensioners in northern England and the southern United States (McVicar
2006).
In a pioneering work, Beltrametti (1996) describes the differential growth and
distribution of invalidity benefits over time and across Italian regions. He also
discusses their role as an inefficient instrument of income redistribution.
Several factors explain the spatial concentration of disability pensions, such as
the concentration of dangerous economic activities that may create accidents
leading to disability benefits; poverty (Smith 1998; Currie and Madrian 1999) and
unemployment (Disney and Webb 1991), as they can affect health and therefore
disability; the concentration of the ageing population (McVicar 2006); doctors’
discretionary behaviour, as such behaviour may be influenced by local labour
market conditions in certifying disability (Ritchie et al. 1993); and generally poor
conditions in the labour markets themselves, which lead to an increase in the
demand for disability pensions.
Regarding Italy, Baldacci and De Santis (2003) compare ISTAT and Bank of
Italy data and report that the number of disability pensions paid out to individuals
of working age is about twice the number of disabled people of working age.
Furthermore, Baldacci and De Santis demonstrate a relationship between unem-
ployment rate and disability pensions, and they comment on the use of disability
pensions as an improper instrument of income support. This relationship mirrors
8 Civilian Disability Pensions as an Antipoverty Policy Instrument? 151
earlier results from Castellino (1976), Beltrametti (1996) and Baldacci and Milan
(1998). Silva et al. (2010) test a similar hypothesis using European and American
microdata. Interestingly, they distinguish between ‘‘work disability’’ and ‘‘health
disability’’ and explore possible interactions between the two. Work disability is
affected by socio-economic factors (e.g., poverty rates and unemployment rates),
while health disability is associated with health problems of the recipient of
invalidity benefits. Several factors affect work disability at the geographical level,
such as the unemployment rate, the poverty rate, and the distribution of wages in
labour markets. The last factor is important because disability pensions act as the
reservation wage. In Italy, despite the centralised system of wage determination,
there are large interregional wage differentials because some workers receive
wages above the contractual minimum. In addition, there is flexibility in
describing workers’ occupations and, therefore, in determining their contractual
minimum wage. In this work, we concentrate on poverty rates because data
regarding salaries and occupations are not available at the provincial level.
Silva et al. (2010) investigate possible interactions between health and work
disability such as the effects of unemployment-related stress on health and
attempts to fraudulently receive invalidity benefits when unemployed. In our work,
we follow the methodology developed by Silva et al. (2010) except that we use
poverty rates rather than unemployment rates as indicators of work disability.1
No significant relationship emerges between the two variables (health disability
and poverty rates), even though indicators of health disability are controlled for in
the test of the relationship between the number of recipients of disability pensions
and the poverty rate. Regression results often indicate a negative relationship
between indicators of health disability and the poverty rate, except for specific
types of medical conditions. A further test was conducted for these specific
medical conditions, and the results allow us to conclude that health disability is not
a primary factor to explain the uneven distribution of disability pensions in Italian
provinces. These results continue to hold when the spatially lagged variable is
introduced, which accounts for similarities among regions that go beyond
administrative boundaries. It is suggested that the results can be explained by the
different explicit or implicit rules that govern the attribution of invalidity benefits
in the various geographical areas, which is a theme that we develop in this paper.
The paper is organised as follows: Sect. 8.2 presents the characteristics of the
disability pension system in Italy, the data used in the analysis, and some pre-
liminary results. Section 8.3 develops a spatial analysis to test for spillovers in
neighbouring provinces. Section 8.4 presents results of the econometric tests of the
hypothesis that disability pensions are used as an antipoverty policy instrument.
Section 8.5 presents some further results that check for spatial significance and
impact of the poverty rate. Section 8.6 presents concluding remarks.
1
In our case, we use poverty rates and rates of population over 55 as control variables (McVicar
and Anyadike-Danes 2007; Disney and Webb 1991; Autor and Duggan 2003; McVicar 2006;
Beltrametti 1996).
8.2 Characteristics of the Disability Benefit System

in Italy, Data Used, and Some Preliminary Results
In Italy, there are three ways to financially support people with disability that are
generally referred to as disability pensions. Invalidity pensions are paid to people
with a reduced ability to work, provided that they have reached a certain age and
that they have made a certain number of national insurance contributions over the
years. Indemnity pensions are paid for accidents at work or for professionally
related diseases. Civilian disability pensions are not connected with national
insurance contributions; they are paid to disabled people on the basis of their
physical characteristics (e.g., people affected by blindness, deafness, or other types
of impairments). These pensions are also paid to people with no income or
insufficient income after the age of 65 (Ministero del Lavoro e delle Politiche
Sociali 2006, 2008).
In a more general version of this paper investigating all three types of disability
pensions, we find that civilian disability pensions are particularly relevant to the
topic under investigation; therefore, we focus on civilian disability pensions in the
following analysis.
We use data on the 103 Italian provinces, corresponding to the European level
NUTS-3 over the period from 2003 to 2005, and we concentrate on individuals of
working age (aged 15–64).2 ISTAT provides provincial data on unemployment
rates for people aged 15–64, poverty rates, percentage of population over 55, and
rates of various illnesses. INPS provides data on the number of people receiving
disability benefits Provincial data are used as we explicitly introduce the spatial
element in our analysis, as it is well known that administrative data aggregate
individuals on the basis of arbitrary geographical boundaries reflecting political
and historical situations. The choice of the spatial aggregation unit is therefore
essential as different choices may lead to different results in the estimates (Arbia
1988). Regional data cannot be considered ‘‘independently generated’’ (Anselin
1988; Anselin and Bera 1998) because of spatial similarities of neighbouring
regions; thus, standard estimation procedures3 can provide biased estimators of the
parameters. Aggregating data at the provincial level will allow spatial effects, such
as spatial spillovers, to be properly modelled (Arbia et al. 2002; Arbia 2005).
In this section, we provide a preliminary investigation of variables that may
explain the prevalence4 of civilian disability pensions over the various provinces,
by observing the plots of the various variables considered.
2
This choice excludes from our data income support transfers to the poor aged over 65 with
insufficient incomes, which are included under the category of civilian disability pensions.
3
That is, estimates that do not take into account spatial dependence.
4
Prevalence measures the proportion of ‘‘events’’ in a given population at a given time. In other
words, prevalence measures the proportion of individuals in a given population who suffer from a
specific illness. In our case, the concept of disability replaces that of illness.
Fig. 8.1 Standard deviation map: civilian disability pensions, and poverty rates (2005)
In Fig. 8.1,5 we plot prevalence rates for civilian disability pensions and
poverty rates as a Standard Deviation Map.
From visual inspection of the maps, two clusters emerge for the civilian
disability pensions and poverty rates; both variables show values above the
average in the south and below the average in the north. This first impression
confirms the hypothesis that poverty affects both the demand for and the supply of
civilian disability pensions; where economic conditions are difficult, individuals
seem to apply for more civilian disability pensions, and these pensions also seem
to be granted more easily. The maps of Fig. 8.1 also show that high poverty rates
are largely concentrated in the south.
5
We only show maps for 2005 as those of previous years do not add any relevant information
due to spatial persistence. The number in parenthesis next to each range indicates the number of
provinces for which the prevalence rate falls within that range.
The last variable that we consider in this preliminary investigation is the

distribution of the health of the population at the provincial level, which we
interpret as an indicator of health disability. If we observe a concentration of health
disability in specific provinces, this could be an explanation for a possible
concentration of civilian disability pensions. For lack of more precise variables, we
consider the rates of discharge6 from hospitals of individuals affected by a variety
of illnesses7 as indicators of the health of the population at the provincial level.
The scatterplots of the various illnesses, not shown here for brevity, suggest that
the distribution of illnesses does not follow a north–south geographic pattern;
therefore, the plots do not allow us to conclude that the higher number of civilian
disability pensions in the south can be explained in terms of higher rates of health
disability in the south.
Given the results of this preliminary investigation, we proceeded to apply
econometric techniques to identify factors that can explain the concentration of
civilian disability pensions in the south.
8.3 Spatial Correlation: Further Analysis
Figure 8.1 in Sect. 8.2 has shown two rather marked clusters of the prevalence
rate of civilian disability pensions. In this section, we investigate spatial cor-
relation as a stepping stone towards further analysis. In particular, we want to
test an hypothesis of ‘‘spatial persistence’’; we examine whether neighbouring
provinces tend to display similar rates of civilian disability pensions (Cracolici
et al. 2007).8
6
We define as discharge rate the percentage of individuals discharged from a hospital after a
period of hospitalisation. The discharge rate refers to the last contact with the institution where
the individual has been hospitalised.
7
Previous empirical works on aggregate data have never considered variables related to the state
of health as precise as ours. For instance, Nolan and Fitzroy (2003) use the number of visits to the
hospital and the mortality rate as health indicators; Autor and Duggan (2003) also use the
mortality rate, as do many other authors; and Stapleton et al. (1998) use a measurement of the
incidence of AIDS. Note that the mortality rate is criticised in the literature when used as a
regressor to explain the incidence of disability (McVicar and Anyadike-Danes 2007).
8
On the contrary, we talk of a uniform spatial structure.
Table 8.1 Moran I index calculated over prevalence rates of civilian disability pensions
Year Variable Moran I index Standard deviation p-value
2003 Civilian disability pensions 0.8380 0.0703 0.0010*
*Significant at 0, 01
For this purpose, we used the Moran I index,9 the most traditional indicators of
spatial correlation.
Table 8.1 shows the values of the Moran I Index for the prevalence rates for
civilian disability pensions over the years from 2003 to 2005. These values show
positive spatial autocorrelation, which will have to be accounted for during the
econometric estimation in Sect. 8.5.
We then applied another instrument of spatial statistics, the Local Indications
of Spatial Autocorrelation (LISA), which allowed us to test for local spatial
autocorrelation and to identify local clusters where adjacent areas show similar
values.10 The LISA cluster map allows us to identify four types of spatial auto-
correlation in two categories: spatial clusters (negative values next to negative
values, and positive values next to positive values) and spatial outliers (negative
values next to positive values, and positive values next to negative values).
In other words, this analysis shows the areas with a local Moran statistic signifi-
cantly different from zero classified by the kind of spatial correlation. The four
types of spatial correlation, High–High, Low–Low, Low–High, and High–Low,
correspond to the four quadrants of the Moran I Index. The areas characterised by
spatial correlation High–High and Low–Low suggest spatial clusters (given the
similarity of values) while the areas classified as High–Low and Low–High signal
spatial outliers (given the dissimilarity of values).
We only show results for the year 2005; previous years add nothing to the
discussion because of the spatial persistence of the data.
9
The Moran I Index is similar to the correlation coefficient: it varies between zero and one, -1
and +1. When I equals zero, there is no spatial autocorrelation; when I is close to -1 or to +1
there is high negative or positive spatial autocorrelation, respectively.
The I index has the following main characteristics when compared with the coefficient of
correlation:
1. It takes one, and not two, variable into account.
2. It incorporates the weights (wij) that index the relative areas. In our case, these are organised
in a matrix of inverse distances expressed in km. This choice of weights allows us to formalise
the hypothesis that the relationships among individual areas tend to decrease in strength as
distances between these areas increase.
3. It is appropriate to think of it as ‘‘the correlation between neighbouring values on a variable’’
(O’Sullivan and Unwin 2003).
10
The statistics to measure the degree of spatial autocorrelation at local level (LISA) allow us to
identify the contribution of each province to the overall autocorrelation (Moran I Index);
therefore, we can investigate the variation in spatial autocorrelation across the whole area. By
focusing on each individual province, these techniques can be used to identify spatial clusters.
Fig. 8.2 LISA cluster map

(2005)
In Fig. 8.2, two clusters emerge for civilian disability pensions. Dark areas
(High–High areas) mark provinces with the highest concentration of recipients of
civilian disability pensions; they identify provinces in the south of Italy. Grey
areas mark provinces with the lowest concentration of recipients of civilian dis-
ability pensions; they identify provinces in the north of Italy. This result seems to
suggest some autonomy for local agents in applying the national rule when
granting civilian disability pensions.
8.4 Specification of the Model
Following the methodology in Silva et al. (2010), we want to investigate whether

work disability, indicated by the relationship between civilian disability pensions
and poverty rates, is contaminated by health disability.11 For this purpose, we
developed our analysis in steps: in a first step, we regressed discharge rates of
specific illnesses on dummies for provinces (fixed effects) and the provincial
poverty rate, where discharge rate of specific illnesses is interpreted as a proxy for
health disability. If we find a positive relationship, it is possible that the rela-
tionship between work disability and poverty is partially explained by a rela-
tionship between health disability and the poverty rate. This implicit hypothesis
has to be tested to show that civilian disability pensions have been used as an
antipoverty policy instrument both across time and space and that civilian dis-
ability pensions are not explained by variations in health disability. In a second
11
If work disability is linked to socio-economic conditions (e.g., poverty rate) and if health
disability is only partially linked to work disability, then health disability is, as a consequence,
related to socio-economic conditions (the poverty rate) with a circular link.
step, we regressed the prevalence rates of civilian disability pensions on the

poverty rate controlling for the unemployment rate and the rate of ageing popu-
lation. In the third step, we tested the robustness of the relationship between
civilian disability pensions and the poverty rate by repeating the regression
mentioned in the second step, but adding the discharge rates of the various ill-
nesses as regressors. Only if the coefficient on the poverty rate is still significant
and positive can we draw the conclusion that civilian disability pensions are used
as an antipoverty policy instrument.
As we use panel data, we had to decide whether to use fixed or casual effects in the
first step; the estimates could be very different in our case, as the time considered is
short and the number of considered units is large. It is advisable to choose the fixed
effect model when the sampled individuals (in our case Italian provinces) cannot be
assumed to be casually extracted from the population. The Hausman test allowed us
to choose between the two models. If the test rejects the null hypothesis, the fixed
effect model is preferred (Baltagi 2005; Verbeek 2009).
From Table 8.2, the results from the Hausman test show that it is correct to use
the fixed effect method. They also show that the relationship between discharge
rates for various illnesses and the poverty rate is in most cases significantly
negative, or not significant; therefore, there is no evidence that health disability is
positively influenced by the poverty rate. However, a positive and significant
relationship between health disability and poverty is found for three groups of
medical conditions: glands, circulatory system, and congenital malformation.
Table 8.3 shows the results of the test associated with the second step of our
investigation: the estimation with fixed effects.
Table 8.3 shows that the coefficient on the poverty rate is significantly positive at
the national level in columns I, II, III and IV. At the territorial level of disaggregation,
the results show that the coefficient of the rate of poverty is positive and significant
only for the south of Italy whether or not we include rates of discharge for the various
medical conditions. These results clearly indicate that civilian disability pensions are
not homogeneously distributed across the country; moreover, they indicate that
socio-economic variables, such as the poverty rate, are significantly correlated with
the attribution of civilian disability pensions in the south. This result suggests that the
national rule regarding the attribution of civilian disability pensions has a margin for
interpretation by local institutions. These findings allow us to conclude that from
2003 to 2005 in the south of Italy, civilian disability pensions were used as an
instrument of income support for the poor.
8.5 Geographical Distribution of Civilian Disability

Pensions: Further Analysis
We now move to the third step of our investigation. According to the theory, units
spatially close to each other show a higher probability of similar behaviour when
compared with units that are spatially distant (Huckfeldt 1986; Vasquez 1995;
Table 8.2 Estimates with fixed effects (FE) and random effects (RE): relationship between the
discharge rates of various illnesses and the poverty rate
Dependent variable: % of discharges for the Constant Coefficient on the Hausman
various illnesses poverty rate test
Liver 19.64611* -1.71601 42.73*
(68.25) (-0.72)
Diabetes 22.40132* 1.908563 25.47*
(58.96) (0.61)
Genital urinary apparatus 153.5469* 0.7475317 31.97*
(143.96) (0.08)
Breathing apparatus 137.0665* -20.50656** 30.40*
(150.79) (-2.72)
Glands 63.59959* 17.6263* 32.78*
(112.14) (3.75)
Blood diseases 24.63499* 3.394031 17.33*
(75.21) (1.25)
Muscular system 130.6292* 12.32411 13.87*
(146.61) (1.67)
Skin diseases 34.02201* -6.698444** 59.60*
(105.84) (-2.51)
Circulatory system 292.8374* 43.47461* 1.30
(59.85) (3.27)
Morbid conditions 83.19982 -1.001942 59.56*
(93.00) (-0.13)
Tumours 195.4509* 10.42277 0.20
(61.34) (1.12)
Congenital malformations 20.4439* 5.123178* 21.90*
(104.59) (3.16)
Nervous system 172.8303* 13.30279 7.93*
(70.84) (0.66)
*, **, and ***: 1, 5, and 10%; (): t-statistics
Cardoso and Faletto 1979). The Moran I Index (Table 8.1 above) has indicated a
rather evident positive spatial correlation for civilian disability pensions. So far our
estimates have considered individual economic units to be entirely self-contained;
this fundamental hypothesis is rather doubtful, as provinces are units defined by
administrative rules, which ignore historical and economic similarities. Therefore,
it is likely that spillovers go beyond administrative boundaries, with decreasing
effects as distances increase.
We introduced spatial effects into the relationship between the prevalence rate
of civilian disability pensions and the poverty rate in order to take into account
spatial effects of different provinces.12 These effects are represented by a spatially
12
By estimating a model ignoring spatial clustering, an inefficient estimate of the parameters is
obtained. The standard errors are underestimated, and a type I error is made. Luckily, local or
global measures of spatial autocorrelation are estimated to decide whether the data show spatial
dependence, and here, the Moran I index indicates a clear process of positive spatial
autocorrelation to be considered in further estimates.
Table 8.3 Fixed effects estimates (FE)
Dependent variable: FE (I) FE (II) FE (III) FE (IV) FE (V) FE (VI) FE (VII) FE (VIII)
prevalence rate of civilian
invalidity pensions
Constant -3.806* -2.962* -3.852* -3.168* -3.773* -3.044* -3.816* -3.070*
(-4.75) (-3.89) (-5.01) (-4.15) (-4.66) (-3.96) (-4.95) (-4.10)
Unemployment rate -0.0118* -0.0108* -0.0118* -0.0105*
(-3.13) (-3.14) (-3.10) (-3.03)
Unemployment rate South -0.0176* -0.0138* -0.0176* -0.0150*
(-4.60) (-3.77) (-4.61) (-4.15)
Unemployment rate North 0.0348* 0.0145 0.0396* 0.0218***
(2.96) (1.31) (3.21) (1.94)
Unemployment rate Centre 0.0136 0.0146 0.0164 0.0130
(0.86) (0.99) (1.01) (0.89)
Poverty rate 0.5130* 0.2611** 0.4772* 0.3355*
(4.32) (2.26) (4.19) (2.97)
Poverty rate South 0.5035* 0.2968** 0.4950* 0.3037**
(4.00) (2.45) (4.14) (2.58)
Poverty rate North 0.5155 -0.1182 -.1046 -0.4491
(1.10) (-0.28) (-0.22) (-1.04)
Poverty rate Centre 0.7363 0.0579 0.9572 0.3170
(1.24) (0.11) (1.65) (0.61)
Age [55 0.2620* 0.1913* 0.2600* 0.1980* 0.2601* 0.1951* 0.2577* 0.1913*
(6.08) (4.59) (6.30) (4.74) (5.97) (4.65) (6.22) (4.68)

Liver -0.0031 -0.0034 -0.0030 -0.0020
(-0.92) (-1.01) (-0.89) (-0.60)
Diabetes -0.0095* -0.0079** -0.0099* -0.0085**
(-2.91) (-2.39) (-3.00) (-2.63)
Genital urinary -0.00026 -0.00069 -0.00006 -0.0001
apparatus (-0.24) (-0.62) (-0.06) (-0.13)
(continued)
159
Table 8.3 (continued)
160
Dependent variable: FE (I) FE (II) FE (III) FE (IV) FE (V) FE (VI) FE (VII) FE (VIII)
invalidity pensions
Breathing apparatus -0.0017 -0.00166 -0.0017 -0.0012
(-1.62) (-1.49) (-1.58) (-1.18)
Glands 0.0055** 0.0047*** 0.0057** 0.0050**
(2.33) (1.99) (2.40) (2.16)
Blood diseases 0.00041 0.0008 0.0003 0.0014
(0.15) (0.30) (0.11) (0.51)
Muscular system 0.0046* 0.0042* 0.0048* 0.0041*
(4.34) (3.85) (4.45) (3.87)
Skin diseases -0.0096* -0.0082** -0.0098* -0.0106*
(-3.01) (-2.77) (-3.05) (-3.38)
Circulation system -0.00099 -0.0010 -0.0010 -0.0011
(-1.46) (0.114) (-1.57) (-1.66)
Morbid conditions -0.0007 -0.0012 -0.0007 -0.0008
(-0.66) (-1.14) (-0.62) (-0.74)
Tumours 0.0039* 0.0031* 0.0037* 0.0041*
(3.66) (3.08) (3.52) (3.90)
Congenital malformations 0.0081*** 0.0077 0.0077 0.0070
(1.78) (1.68) (1.69) (1.57)
Nervous system -0.0011* -0.0009** -0.0011** -0.0009*
(-2.86) (-2.33) (-2.75) (-2.23)
R2 overall 0.3779 0.4857 0.4475 0.5020 0.3790 0.4758 0.3986 0.4931
Hausman Test 21.20* 148.08* 155.47* 120.69* 145.55* 152.03* 153.98* 158.83*
*, **, and ***: 1, 5, 10%; (): t-statistics
M. Agovino and G. Parodi
lagged vector of the prevalence rate of civilian disability pensions in the provinces.
The purpose is to test whether the prevalence rate of civilian disability pensions in
a given province depends on the weighted average of the prevalence rate of
civilian disability pensions in other provinces.
Including the spatially lagged variable among the regressors makes estimators
based on OLS biased and inconsistent, regardless of the properties of the error
term (Anselin 1988). Hence, we employed a ‘‘Two-Step feasible GMM Estima-
tion’’ (Baum et al. 2002). This method provided a suitable set of tests to determine
the validity of the variables used to instrument for the spatially lagged dependent
variable.13 The results of this test are shown in Table 8.4.
In Table 8.4, the estimates with GMM disaggregated to the macro-areas show
that the poverty rate is significant only for the south of Italy (columns V and VII);
however, the coefficient on the poverty rate loses significance when the regressors
for health disability are introduced in the estimates (columns VI and VIII). This
result seems to suggest that civilian disability pensions have not been used as an
antipoverty policy instrument. However, column IX refines the analysis by
excluding the discharge rates for gland and circulatory system problems and
congenital malformation, which are the three variables that appeared to be sig-
nificant in Table 8.2. We estimated the fixed effect model of the relationship
between poverty and health disability without these three variables. When these
three regressors are excluded, the poverty rate becomes significant once again.
This result suggests that we cannot discount the hypothesis that civilian disability
pensions are used as a poverty relief policy instrument. In fact, these results
suggest that only for the three medical conditions excluded from column IX,
civilian disability pensions take health disability into account, and not the socio-
economic conditions of the area. Furthermore, for all the other types of medical
conditions considered, civilian disability pensions do not deal with health dis-
ability; they are instead used as antipoverty policy instruments. This conclusion is
confirmed by the fact that the various pathologies except those excluded from
column IX are either scarcely significant or not significant in explaining the
prevalence rate of civilian disability pensions.
In addition, the significance and importance of the spatially lagged variable
shows spatial dependence among local markets at provincial level, indicating that
an increase in the prevalence rate of civilian disability pensions in a given province
is associated with an increase in the same variable in neighbouring provinces; this
was also shown by the Moran I Index above. Additionally, the LISA cluster map
above shows that the behaviour of economic units is not spatially stable, but
13
The literature suggests using spatial lags of the regressors as instruments (Anselin 1988).
Table 8.4 Two-step feasible GMM estimation
162
Dependent variable: I II III IV V VI VII VIII IX

invalidity pensions
Unemployment rate -0.009* -0.008* -0.008* -0.0072*
(-4.21) (-3.78) (-3.71) (-3.42)
Unemployment rate -0.0075* -0.0076* -0.0071* -0.0075* -0.0074*
South (-3.09) (-3.47) (-2.92) (-3.46) (-3.27)
Unemployment rate -0.0177** -0.0107 -0.012 -0.008 -0.0078
North (-2.05) (-1.18) (-1.39) (-0.91) (-0.89)
Unemployment rate -0.0033 -0.0011 -0.005 -0.0019 -0.0021
Centre (-0.53) (-0.21) (-0.77) (-0.30) (-0.34)
Poverty rate 0.202* 0.149 0.1893** 0.1308
(2.18) (1.34) (2.02) (1.16)
Poverty rate South 0.224** 0.170 0.273* 0.1706 0.2057**
(2.22) (1.37) (2.39) (1.37) (1.91)
Poverty rate North -0.232 -0.249 -0.228 -0.266 -0.2889
(-1.14) (-1.09) (-1.20) (-1.27) (-1.37)
Poverty rate Centre 0.219 -0.013 0.181 0.0160 0.0716
(0.71) (-0.05) (0.55) (0.05) (0.24)
Age [55 0.103* 0.073* 0.1075* 0.0719* 0.111* 0.075* 0.1006* 0.075* 0.0750*
(4.55) (3.03) (4.59) (2.97) (4.83) (3.21) (4.25) (3.22) (3.32)
Liver 0.0023 0.0027 0.0029 0.0029 0.0032
(0.90) (1.09) (1.18) (1.17) (1.23)
Diabetes -0.0001 -.0007 -0.0010 -0.0009 -0.00085
(-0.06) (-0.34) (-0.52) (-0.45) (-0.56)
Genital urinary -0.0013** -0.0014** -0.001*** -0.0012*** -0.0011***
apparatus (-2.11) (-2.31) (-1.82) (-1.82) (-1.80)
Breathing apparatus -1.70e-06 -0.0003 -0.0003 -0.0002 -0.00024
(-0.00) (-0.56) (-0.50) (-0.40) (-0.38)
Glands -0.0003 0.0001 0.0003 0.0002
(-0.22) (0.08) (0.20) (0.13)
Blood diseases 0.0003 -0.0001 -0.0003 -0.0001 -0.00002
(0.21) (-0.07) (-0.22) (-0.10) (-0.02)
(continued)
invalidity pensions
Muscular system -0.0009 -0.0007 -0.0005 -0.0005 -0.00054
(-1.36) (-1.08) (-0.82) (-0.83) (-0.81)
Skin diseases -0.005** -0.0057** -0.0058** -0.006** -0.0056**
(-2.21) (-2.28) (-2.31) (-2.40) (-2.30)
Circulatory system 0.0001 0.0002 0.0001 0.0001
(0.40) (0.46) (0.33) (0.26)
Morbid conditions 0.0011 0.0009 0.0010 0.0009 0010
(1.21) (1.01) (1.12) (1.05) (1.15)
Tumours 0.0013** 0.0015** 0.0014** 0.0014** 0.0015*
(2.27) (2.48) (2.37) (2.40) (2.69)
Congenital malformations 0.0029 0.0026 0.0018 0.002
(1.07) (0.98) (0.69) (0.77)
Nervous system 0.0005** 0.0005* 0.0006** 0.0006* 0.00061**
(2.40) (2.56) (2.55) (2.73) (2.63)
Spatial lag 0.858* 0.944* 0.878* 0.926* 0.862* 0.929* 0.883* 0.926* 0.924*
(22.06) (16.64) (19.17) (15.53) (22.65) (16.58) (19.20) (15.56) (16.73)
Uncentered R2 0.8072 0.8333 0.8085 0.8338 0.8105 0.8359 0.8112 0.8362 0.8356
Shea’s partial R2 test of instrument 0.9963 0.9934 0.9887 0.9822 0.9904 0.9841 0.9882 0.9825 0.9880
strength of spatial lag
F-test on the joint nullity of the 4484.52 5079.97 1825.38 2029.24 2185.33 2298.72 2876.36 2062.83 2016.60
instruments [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000]
Kleibergen-Paap rk LM statistic 101.40 82.75 84.59 76.53 97.35 82.34 81.20 75.63 78.79
[0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000]
Kleibergen-Paap rk wald statistic 47865.90 22504.82 17626.30 11421.41 21102.05 12938.18 15271.40 11738.73 16546.60
[0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000]
Anderson-Rubin wald (F) 49.37 61.29 41.59 41.16 54.81 46.90 65.00 40.86 46.71
[0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000]
Anderson-Rubin wald (Chi-sq) 526.95 271.53 401.57 231.69 529.30 263.98 345.10 232.51 261.45
[0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000]
(continued)
163
164

invalidity pensions
Stock-Wright LM S statistic (Chi-sq) 82.11 71.77 71.65 60.68 83.11 71.25 68.17 60.14 63.00
[0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000] [0.0000]
Kleibergan-Paap rk wald F-statistic 4484.524 5079.973 1825.377 2029.242 2185.326 2298.725 2876.361 2062.825 2016.602
Stock-Yogo weak ID test critical values: 38.54 24.58 36.19 26.87 36.19 26.87 26.87 26.87 26.87
10% maximal IV size
15% maximal IV size
20% maximal IV size
25% maximal IV size
Hansen J statistic (overidentification test 13.733 5.835 12.625 5.441 13.130 5.526 4.549 5.687 5.726
of all instruments) [0.1321] [0.1199] [0.1254] [0.2450] [0.1075] [0.2375] [0.3367] [0.2238] [0.2205]
Hansen J statistic (eqn. excluding suspect 7.924 2.380 6.538 2.026 5.981 1.863 1.254 2.086 1.438
orthog. conditions) [0.1604] [0.1229] [0.1624] [0.1547] [0.2006] [0.1722] [0.2627] [0.1486] [0.2304]
C statistic (exogeneity/orthogonality 5.808 3.455 6.087 3.415 7.148 3.663 3.295 3.601 4.288
of suspect instruments) [0.2139] [0.1777] [0.1927] [0.3319] [0.1282] [0.3003] [0.3483] [0.3079] [0.2320]
(): t-statistics; []: p-value; *, **, and ***: 1, 5, and 10%
generates specific spatial regimes: a cluster of provinces for the north and one for
the south of Italy. Positive spatial autocorrelation and spatial heterogeneity support
our claim that ‘‘spatial persistence’’ exists.14
Despite the high value of the R2, we can exclude multicollinearity between the
poverty rate and the various discharge rates because of the significance of the
regressors.15
8.6 Conclusions
The main purpose of this work has been to investigate the hypothesis that civilian
disability pensions are used as an antipoverty instrument in Italy, using provincial-
level data. The results confirm that this hypothesis is true in the south of Italy, as
we find a positive and significant relationship between the prevalence rate of
civilian disability pensions and poverty rate, even when controlling for indicators
of health disability. These results robustly hold when the spatially lagged depen-
dent variable is introduced among the regressors. The positive spatial autocorre-
lation and spatial heterogeneity indicate ‘‘spatial persistence’’ and spatial
relevance in the diffusion process of civilian disability pensions. In addition, the
spatial variable allows us to take into account the local dimension, and the possible
social, historical, and cultural links among provinces that go beyond administrative
boundaries.
The rules governing the attribution of civilian disability pensions are clearly
defined and uniform at the national level. However, the application of these rules is
14
Notes on the tests in Table 8.4: the Shea partial R2 appears to be rather high, while the F-test
of joint nullity of the instruments rejects the null hypothesis; this allows us to conclude that the
instruments are valid and relevant. The rank tests, Kleibergen-Paap rk LM statistic and
Kleibergen-Paap rk Wald statistic, reject the null hypothesis and allow us to conclude that the
model is identified. The Anderson-Rubin Wald (F), Anderson-Rubin Wald (Chi-sq) and Stock-
Wright LM S statistic (Chi-sq) tests reject the null hypothesis and reassure us of the robustness of
the instruments that we used. In addition, we observe that the Kleibergan-Paap rk Wald F-
statistic is much bigger than the value of the Stock-Yogo, shown four rows later; thus, we
conclude that the instruments are strong. As a general conclusion, the estimated model is
identified and contains valid, relevant and strong instruments. Finally, to test whether the
instruments are uncorrelated with the residuals, we calculate the Hansen (J-test) of overiden-
tification and orthogonality, as well as the C statistic of exogeneity of the instruments. As all of
the tests do not reject the null hypothesis, the instruments can be considered exogenous (Baum
et al. 2002).
15
The calculation of the Variance Inflation Factor (VIF) allows us to control for multicollin-
earity and to exclude it, as for each variable, VIF \10; the highest VIF, found for the variable
‘‘genital urinary apparatus’’, is 5.21, which is well below the threshold. The average VIF is 2.99.
The tolerance associated with each variable, 1/VIF, is [0.1, which allows us to exclude
multicollinearity (a tolerance value \0.1 is comparable with a VIF equal to 10). Finally, the
conditional number, which is generally used to assess the global instability of the regression
coefficients, suggests stability, as it is 7.7270 where 10 is the threshold value.
deferred to local medical and administrative committees, which have discretion in

interpreting these general rules. These institutions may take into account local
socio-economic conditions; this fact can explain the distribution of civilian
disability pensions across provinces. Finally, civilian disability pensions are not a
flexible instrument; once granted, they are very rarely withdrawn, even though
such withdrawal is technically possible. Therefore, it would be improper to use
civilian disability pensions as an income support instrument, as they often are
invariable with respect to possible changes in the economic conditions of the
recipients. More suitable instruments ought to be used as income support
measures.
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Part III
Economic Crisis, Labour Markets
and Social Exclusion
Chapter 9
Measuring the Long Wave.
Unemployment, Discouragement
and Semi-Employment in Italy, During
and After the Crisis
Leonello Tronti and Riccardo Gatto
Abstract The official data indicate a much less severe impact of the international
crisis on employment and on the incomes of wage-earners and pensioners in Italy
than might have been predicted. But the standard measure of unemployment
agreed at international level has some shortcomings. For one thing, the ‘‘objec-
tive’’ definition of unemployment is a poor fit with the Italian labour market. And
for another, the considerable increase in labour hoarding and the emergence of
‘‘semi-employment’’—the alternation of brief periods of work with periods of
unemployment or economic inactivity—make the state of the market hard to
assess. The paper offers a more in-depth examination of the impact of the crisis,
using labour force survey data to count labour underutilization, funded and
unfunded labour hoarding, the discouraged, and semi-employed workers. The
picture that emerges is one of a ‘‘long wave’’ of available labour underutilization:
the Italian labour market has to cope with an increase in joblessness broadly
conceived of about 1,400,000—more than twice the rise in official unemployment.
This wave will inevitably last for years to come, until the pools of implicit and
explicit unemployment are reabsorbed and jobs are created for those now unoc-
cupied and the new entrants. So now is the time for reform of unemployment
benefits, not just to provide income support for those caught up in the long wave of
joblessness, but also to permit quicker reorganization of production. The reform
will have to highlight the diverse interests and roles of government and of the
social partners, within the framework of a new development and industrial policy.
L. Tronti (&)
Università Roma Tre, Rome, Italy
e-mail: l.tronti@funzionepubblica.it
R. Gatto
ISTAT, Rome, Italy
e-mail: rigatto@istat.it
172 L. Tronti and R. Gatto
Keywords Labour underutilization measurement Unemployment Labour

hoarding Discouragement Semi-employment Unemployment benefit
JEL Codes E24 J21 J64 J68
9.1 Crisis and the Labour Market
Fortunately, the global crisis has had less severe effects on the public finances in
Italy than in other European countries. In 2008 and 2009 the budget deficit
averaged 4.0% of GDP, against 5.7% in France, 7.8% in Spain, 9.6% in the United
Kingdom and 10.2% in Ireland. But the impact on economic performance has been
greater. Over the two years, Italian GDP fell by 3% a year, nearly twice the 1.7%
decline in the euro area. Also, prices continued to rise faster in Italy than in the rest
of Europe (2.2% annually against 1.8% for the euro area).
Considering the sharp fall in output, the impact of the recession on the labour
market was, however, relatively modest. Total employment continued to grow
through the first quarter of 2008, even though GDP had already begun to contract
(Fig. 9.1). Employment growth peaked in that quarter at 1.9% over the same
quarter of 2007. Job growth then slowed, giving way to a contraction in the fourth
quarter. Year on year, therefore, the number of persons employed actually still
grew appreciably in 2008 (by 0.8%), against a 1% fall in GDP. Then, in 2009,
employment fell sharply, with 339,000 fewer persons in work; but again the rel-
ative job loss (1.6%) was much less than the huge fall in output (5.1%). Firms
made ample use of income support programmes, and the number of hours of short-
time working compensation soared.
Per capita labour productivity had begun to slip already in the second quarter of
2007, before the financial crisis was perceived. From then on it fell for eight
consecutive quarters, with an overall loss of 4.8%. A significant portion of this
deterioration was due to labour hoarding by employers, who elected to maintain
staffing levels by cutting overtime, shortening hours and resorting to short-time
working compensation rather than instantly adjust manpower to the demand shock.
And if productivity trend had been the first harbinger of the approaching crisis,
productivity also brought the first signs of recovery. Along with it, output also
began to slowly resume growth.
The contrast between the rate at which productivity rose and the more sluggish
return of output to positive territory highlights the stubborn obstacles to
employment recovery. Firms have begun a period of reorganization (which will
certainly not be brief), but with demand still feeble, the resulting productivity
increase had an adverse effect on an employment situation marked by ample
labour hoarding. The number of people in work, in fact, has not yet responded to
the growth in GDP. Indeed, in the third quarter of 2010, employment declined by a
further 176,000 compared to the same quarter of 2009.
9 Measuring the Long Wave 173
104.0
103.0
102.0
Employment (LFS)
101.0
100.0
99.0
98.0
Labour productivity
(GDP/FTE)
97.0
96.0
GDP
95.0
94.0
I II III IV I II III IV I II III IV I II III IV I II III
2006 2007 2008 2009 2010
Fig. 9.1 Italy: Employment, gross domestic product and labour productivity—2006 Q1–2010
Q3 (Indices, 2006 Q1 = 100; seasonally adjusted data). Source: Istat, National Accounts and
Labour Force Survey
The hardest hit sector was manufacturing, where the impact of the collapse in
exports was most severe. The fall was nationwide, about half of it occurring in the
North. In the service sector, by contrast, while self-employment decreased sig-
nificantly, there was a marginal increase in wage employment in the Centre and
North. Overall, job losses were relatively limited in the Centre and substantial in
the North and especially in the South.
The drop in employment was particularly steep for men, while women’s job
losses were less pronounced, though still significant in relative terms. The self-
employed (craftsmen and small businessmen in services and manufacturing) and
the weakest segments of the labour force (fixed-term employees and freelancers)
were the hardest hit, while ‘‘core’’ staff workers were less affected.
The pattern for unemployment—measured according to the standards of the
International Labour Organization and Eurostat—has essentially been the mirror
image of employment, though with significant differences in timing (Fig. 9.2). The
number of job seekers reached a low of 1.5 million in the second quarter of 2007
and then rose steadily, as the pace of new job creation slowed. Between the second
quarter of 2007 and the same quarter of 2010 the number of job seekers rose by
614,000, while between the employment peak of the first quarter of 2008 and the
third quarter of 2010 the number of persons in work fell in analogous fashion, by
607,000. Overall, thus, the labour force remained relatively stable, albeit with
some cyclical adjustment and a substantial shift from employment to unemploy-
ment. However, with the working-age population still growing by more than
230,000 a year, the employment slump also produced very noticeable discour-
agement, reflected in the fall in the participation rate from its peak of 63.5% in the
second quarter of 2008 to 61.4% in the third quarter of 2010.
23,600 2,200
23,500 2,100
Employment
23,400 2,000
Unemployment (000)
Employment (000)
23,300 1,900
23,200 1,800
23,100 1,700
23,000 1,600
22,900 1,500
Unemployment
22,800 1,400
22,700 1,300
I II III IV I II III IV I II III IV I II III IV I II III
2006 2007 2008 2009 2010
Fig. 9.2 Italy: Employment and unemployment—2006 Q1–2010 Q3. Source: Istat, Labour
Force Survey
Most of the additional unemployment involved men, though it was significant

among women as well. Job seekers were concentrated in the regions of the North
and among job losers. There was a much less pronounced increase in unem-
ployment in the Centre and especially in the South. The average unemployment
rate rose from 6.7% in 2008 to 7.8% in 2009 and reached 8.4% in the first half of
2010. The increase was particularly severe among young people aged 15–24, and
was greatest among young women in the South. The increase in joblessness was
accompanied by an increase of more than 500,000 in the number of working-age
economically inactive, mostly people not actively seeking work because they do
not expect to find it.
9.2 Unemployment and its Measurement: ‘‘Objective’’

and ‘‘Subjective’’ Unemployment, Hidden Unemployment
These figures fairly well depict the recession’s current effect on what we may call
‘‘traditional unemployment,’’ i.e. official statistics of joblessness. But it must be
acknowledged that this picture is defective in two ways. One is the ‘‘objective’’
nature of the status of unemployed. The indicator that has been the international
standard for two decades now entails two objective filters to a person’s inclusion
among the unemployed: ‘‘active job search’’ (he must have taken at least one
definite job search action)1 and a time standard (he must have taken that action no
more than 4 weeks before the survey). In other words, the ‘‘objective’’ definition
completely ignores the respondent’s self-perception.
1
The 13th International Conference of Labour Statisticians (1982) listed eight examples of such
actions.
The objective definition began to be developed at the thirteenth International

Conference of Labour Statisticians, organized by the International Labour Office
(now Organization) in 1982. The conference determined that in normal labour
markets (in terms of job search tools, market organization and extension, level of
demand and rate of self-employment), only those who had taken ‘‘specific steps in
a specified recent period to seek paid employment or self-employment’’ could be
considered unemployed. Subsequently, following some measurement tests using
alternative standards and a highly elusive discussion in the United States,2 in 1990
the ILO specified this ‘‘recent period’’ as 4 weeks (Hussmanns, Merhan and
Verma 1990).3 It is essential in this context to note that the ILO interprets this
four-week standard as a reasonable compromise between the need to count only
people who are actively seeking work at the time of the survey and recognition that
searching for a job is not necessarily a continuous activity.4
In Italy, Istat has used the international standard since 1992, but continues to
ask for the respondent’s own perception of his/her status (the ‘‘subjective crite-
rion’’) and to record job search actions undertaken prior to the official cut-off date.
Obviously, for reasons of international comparability, those not corresponding to
the ‘‘objective’’ standard are not counted as unemployed in the official statistics.
For years now, some Italian researchers have underscored the shortcomings of
the merely objective depiction of unemployment.5 In fact, empirical analysis of the
patterns of entry to employment shows that, holding constant individual charac-
teristics (sex, age, education, etc.), there is no statistically significant distinction in
job entry pattern between the ‘‘objective’’ and the ‘‘subjective’’ unemployed.
Which explains a finding that is well known to those who have worked on lon-
gitudinal studies of the labour market6: namely that employment entry is quite
frequent even outside the group of the ‘‘objectively’’ unemployed. However, the
employment outcomes of those describing themselves as jobless but not satisfying
the objective criteria or those who do not even describe themselves as unemployed
are not enough to make the official measures unrealistic. This critique, in fact,
2
For a strongly critical account, see Carmignani (2009).
3
To be sure, this indication is set out only indirectly, more as a common practice than a
scientifically based recommendation: ‘‘The recent period specified for job search activities need
not be the same as the basic survey reference period of one week or one day, but might be longer.
The 13th ICLS did not specify the length of the job search period. It left its determination open to
countries. In practice, most countries define the job search period in terms of the last month or the
past 4 weeks’’ (Hussmanns 2007).
4
‘‘The purpose of extending the job search period somewhat backwards in time is to take
account of the prevailing time lags involved in the process of obtaining work after the initial step
to find it was made. During these time lags persons may not take any other initiatives to find
work. In particular, this may be the case of persons who can only apply for employment with one
potential employer (e.g. judges) and are awaiting the reply to their application for a job’’
(Hussmanns 2007).
5
Among others, Viviano (2003); Battistin, Rettore and Trivellato (2005); Brandolini, Cipollone
and Viviano (2006); Carmignani (2009).
6
For a sample of these studies, see the references in Di Laurea et al. (2006).
is based implicitly on the unproven claim that there is a strong, exclusive corre-
spondence between unemployment, however measured (‘‘subjectively’’ or
‘‘objectively’’), and eventual entry into employment. Actually, though, studies of
flows into employment have shown that in many cases job entry is instantaneous,
with no search whatever (seasonal work, family work, etc.), just as many cases of
unemployment (self-perceived or not) drag on and on and never result in
employment. This discrepancy is most evident in the South, suggesting that the
southern Italian labour market may still be one of those cases mentioned by the
13th ICLS, in which the objective standard is not fully appropriate, because ‘‘the
conventional means of seeking work are of limited relevance, (…) the labour
market is largely unorganised or of limited scope, (…) labour absorption is at the
time inadequate, or (…) the labour force is largely self-employed’’. With the
exception of the large scale of self-employment—a condition, in any event, that
continues to be much more common in Italy than in the other euro area countries,
seriously limiting the significance of many comparative studies—the other con-
ditions are found to a varying extent in many parts of the South if not throughout
it. In particular, inadequate labour absorption is especially relevant, as it sharply
reduces the effectiveness, for the unemployed, of assiduous job search and thus
fosters what can be called ‘‘hidden unemployment’’. This is not counted in the
official statistics but nevertheless corresponds to a situation of perceived unem-
ployment and rational job search practices reflecting the characteristics of the local
labour market.
It is not easy to gauge the extent to which the employment slump described
above may have resulted in a ‘‘statistical submersion’’ of joblessness beyond the
conventional measure. What is certain is that if in normal times the official
unemployment rate represents only a part—most but not all—of those who are
currently jobless but wanting to work, in times of slumping employment, when the
disappearance of hiring and contract renewals undermines hopes of finding work
and discourages job search, its capacity to represent the real situation is inevitably
diminished. These considerations however, correct as they may be, should not be
used to bolster any destructive critiques to the conventional definition of unem-
ployment, as the benefits of accepted international standards, achieved through a
long study path, are indisputably evident. But the Italian case, analysed in this
paper, provides a good example of the usefulness of devising new, additional
indicators. Complementary to the standard ones, these can help obtain relevant
information to grasp the complexity of the phenomenon.
The downturn-induced increase in the number of inactive persons (those not
covered by the conventional definition of ‘‘labour force’’) can be estimated at more
than half a million and most of these newly idled are people who are not actively
looking for jobs because they don’t think they can find one. This gives us a first
approximation for estimating hidden unemployment, i.e. the decision to take steps
to seek work less frequently than needed to qualify as unemployed by the official
standard, simply because those steps are less likely to lead to employment. This
behaviour may not yet be an outright abandonment of the search for a job but does
signal loss of confidence that it will be an effective way to find work.
9.3 Labour Hoarding
Another aspect to consider in assessing the impact of the crisis on unemployment

beyond the standard measurement of unemployment—more frequently cited in the
debate—is labour hoarding, i.e. the preservation of the employment relationship
during recession by employers who reckon the cost of dismissal and subsequent
rehiring is greater than that of keeping the worker on. Such a choice is all the more
likely in the case of skilled workers and those in whom the employer has made a
substantial training investment. Labour hoarding is certainly a concept of labour
underutilization rather than unemployment, as the worker retains his job, even if
working-time is reduced and can be even annulled to zero hours per week. For the
worker, however, being under labour hoarding can be a status quite similar to
unemployment or, at least, a clear signal of a strong increase in the probability of
losing his job. This explains why some analysts would like labour hoarding to be
included in the unemployment count or, at least, in some other official measure of
workers’ distress.
Since 1945, Italy has had a public incentive for labour hoarding in the form of a
special social insurance programme, providing short-time working compensation
benefits (and other European countries have since done the same).7 This pro-
gramme sustains firms in economic difficulty or undergoing restructuring, main-
taining employment relationships, on reduced working time or even at zero hours,
and compensating workers with income support. It thus makes it more advanta-
geous for the employer to retain staff during recession and, at the same time, gives
workers more stable jobs and income, softening the social and economic reper-
cussions of slumps and mitigating potential industrial conflict. In recent years, and
all the more decisively with the onset of recession, the Italian government has
extended the range of eligible beneficiaries, as well as the term of benefits (even
where the beneficiaries lack the necessary national insurance contributions),
through ‘‘waivers’’. This has certainly eased the economic and psychological
impact of recession for beneficiaries. But at the same time it has meant lower
utilization of the labour capacity of these individuals. In 2009, the unemployment
funded through the programme can be estimated at the equivalent of 300,000 full-
time, year-round workers, some 210,000 more than in 2008. In 2010, the estimate,
which corrects the number of hours of short-time working compensation autho-
rized to firms by a coefficient equal to the ratio between hours authorized and
hours actually paid, is about 380,000.
Not all firms are eligible for short-time wage supplementation, however, even
with the new ‘‘waivers’’, and not all the reduced use of available labour benefits
from social shock absorbers. We can estimate the amount of labour hoarding
outside the short-time working compensation programme by the Wharton
7
For a comparative analysis of programmes for labour redundancy in seven European countries
from both the legal and the economic standpoint, see Carabelli and Tronti (1999).
method,8 assuming that interpolation between the cyclical peaks in productivity

gives a reliable measure of the labour utilization frontier, so that underem-
ployment can be estimated as the gap between that frontier and current pro-
ductivity. By this methodology, if this non-supported labour hoarding was
equivalent to some 140,000 workers in 2007, in 2008 it rose to 370,000 and in
2009, owing to steadily falling labour productivity, peaked at 960,000. As
productivity recovered, in the first three quarters of 2010, it fell back rapidly,
and the third quarter value was 210,000.
9.4 Unemployment and ‘‘Semi-Employment’’
The second, and even more serious reason for dissatisfaction with the limitations
of standard international statistics of the labour market stems from the increasing
importance of fixed-term and temporary work: fixed-term contracts, temporary
employment, seasonal work, freelance collaborations, casual work, etc. Here, the
traditional labour statistics risk not only overestimating unemployment but
improperly representing unemployment and employment alike. As some recent
studies have pointed out (Carmignani 2009; Schiattarella 2009), the temporary
nature of jobs for ever-growing segments of the labour market means that,
instead of the two traditional and mutually exclusive work statuses (‘‘employed’’
and ‘‘unemployed’’), there is a continuum of positions of ‘‘semi-employment’’,
inevitably weakening the capacity of official statistics to accurately portray the
labour market. In other words, people whose employment is intermittent simply
cannot be labelled, during the time periods envisaged by the official statistics
(month, quarter, year) as unequivocally and exclusively either employed,
unemployed or inactive.
For example, if the average duration of the employment spells of intermittent
workers were around 4 months a year (as studies of semi-employment hypothe-
size), then at any given time a ‘‘semi-employed’’ person would have one chance in
three of being officially counted as unemployed or inactive. This would do away
not only with the clear conceptual distinction between employed and unemployed,
but also with the ideal matching of the statistical representation of persons with the
variables of the labour market. The snapshot of employment and unemployment
would no longer portray given and relatively stable population groups with
characteristic attitudes and economic behaviour, but merely the distribution at a
given point in time of the occupational status of a shifting population that consists
increasingly of persons who, depending on the time of the survey, may find
themselves employed, unemployed, or inactive. Their attitudes and behaviour are
accordingly quite different from those of the ‘‘permanent’’ employed and
unemployed.
8
For a critical presentation, see Taylor (1970).
Istat’s labour force survey finds a quarterly average of over 2.1 million fixed-
term workers, which means that, counting the 400,000 freelancers as well, there
are 2.5 million people (11% of all employed persons) characterized by potentially
discontinuous employment. That is to say, if the ‘‘semi-employed’’ population
strictly speaking, i.e. people whose fixed-term jobs do not produce steady
employment, were equal to two-thirds of that quarterly potential, and if the esti-
mate of four months’ work per year were accurate, the actual size of this labour
market segment would be not 2.5 million but twice that: 5 million persons. The
recognition of a semi-employed segment this large would inevitably have enor-
mously important consequences. It would affect not only the statistical portrayal of
the labour market and analysis of the behaviour of labour supply but also, for
instance, projections of the exact size of the group of discontinuous workers who
will claim, in the future, subsidized pensions.
On the premise that a high level of semi-employment will ordinarily result in
an overestimate of unemployment or inactivity (the effect, that is, will be
opposite to the restrictive, objective definition of unemployment examined
above), what impact may the crisis and recession have had on this labour market
segment to date? Let us suggest two possible effects. One, which is certain—and
reflected even in the official statistics—is the decline in discontinuous employ-
ment, which largely involves young people under 34 in manufacturing and the
service sector, and especially in the education system. In 2009 alone this seg-
ment contracted considerably, by an estimated 250,000 units on average for the
four quarters, counting both freelancers and fixed-term employees. If, pending
more accurate measurement, we consider the proportion of discontinuous
workers assumed above to be valid, this would imply a drastic reduction of about
half a million people in semi-employment.
The second effect—with an even greater need for empirical confirmation—is
the probable shortening of average annual working time for the semi-employed.
If the recession has induced firms not only not to renew a substantial portion of
fixed-term contracts, but also to shorten those that they do sign, then this also
implies a lower probability that a ‘semi-employed’ worker will be working at the
time of the survey. Hence the shortening of the average employment duration
during the year diminishes the ‘‘statistical visibility’’ of the semi-employed. This
tends to decrease the detection of persons involved in at least some periods of
employment during the year and, correspondingly, to increase the numbers of the
officially unemployed and inactive.
9.5 Some Empirical Evidence from the Labour

Force Survey’
Although the National Statistical Institutes are usually not yet equipped to
provide regular data on hidden unemployment, labour hoarding and
semi-employment, we can use, in the Italian case, the data from Istat’s labour
force survey to construct indicators giving a fuller and more reliable picture of
an increasingly complex labour market and the employment repercussions of
the recession.
9.5.1 Discouraged Workers
The labour force survey gathers important information relevant to the ‘‘discour-
aged worker syndrome’’, in that it identifies the inactive persons who nevertheless
show some interest in the labour market, insofar as they state that they do want to
work and would be immediately available to do so. As a rule, these persons are not
actively seeking work because they do not believe the market gives them any
chance of finding a job. Quite surprisingly, in times of recession, this group
generally contracts, because the perception of higher unemployment leads them to
rule out all prospects of employment.9
The data on the present recession confirm this stylized fact. The number of
discouraged workers decreased by 13.3%, between 2008 Q2 and 2009 Q2, from
1,254,000 to 1,465,000,10 then, in the second quarter of 2010 started again to grow
(by 5.5%) (Table 9.1). Discouragement is more common among women—about
two thirds of the total—although over the 3 years the gap between the sexes
narrowed. The South, though accounting for the majority of discouraged workers,
recorded a modest decline. Only one seventh of the discouraged reside in the
Centre, but their numbers declined more sharply over the period. The smallest
change was in the Northeast, where the discouragement syndrome is also least
widespread.
9.5.2 Short-Time Working Compensation at Zero Hours
One phenomenon on which additional information can be gathered by the labour

force survey is workers receiving short-time working compensation
(Cassa Integrazione Guadagni). Despite the income support benefit and the
retention of their jobs, for these workers this status is a cause of malaise, and in
fact some analysts feel that at least those working zero hours should be counted as
unemployed. The survey does not report which type of benefit a worker is
receiving (ordinary or extraordinary, for how many hours a week, how much, etc.).
But we can record those ‘‘employed’’ workers who report having been absent from
9
The reflux into inactivity, however, is the dual behaviour of the attraction mechanism, stylised
in the 60s by Tella (1964), for which the empirical evidence shows a strong correlation to the
employment cycle.
10
All the data from the Istat labour force survey in this article refer only to the working-age
population (15–64).
Table 9.1 Underutilized labour force by labour market status, sex and region—2007 Q1–2010 Q3 (thousands of persons and percentage changes on
corresponding period of previous year)
2007 2008 2009 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Total
Total val. ass. 2.932 2.712 2.874 3.095 3.230 3.212 3.003 3.102 3.497 3.341 3.263 3.586 3.832 3.599 3.291
var. tend. % – – – – 10.1 18.4 4.5 0.2 8.3 4.0 8.7 15.6 9.6 7.7 0.8
Males val. ass. 1.218 1.066 1.115 1.230 1.328 1.263 1.212 1.368 1.560 1.520 1.529 1.662 1.766 1.708 1.510
var. tend. % – – – – 9.1 18.4 8.7 11.2 17.5 20.4 26.2 21.5 13.2 12.4 -1.2
9 Measuring the Long Wave
Females val. ass. 1.715 1.646 1.759 1.865 1.902 1.949 1.792 1.734 1.937 1.821 1.734 1.924 2.065 1.891 1.781
var. tend. % – – – – 10.9 18.4 1.9 -7.0 1.8 -6.6 -3.2 10.9 6.6 3.8 2.7
Northwest val. ass. 466 411 481 520 485 506 471 552 649 644 616 724 742 693 618
var. tend. % – – – – 4.2 23.0 -2.2 6.1 33.7 27.3 30.8 31.2 14.3 7.7 0.4
Northeast val. ass. 292 277 278 297 327 327 298 305 382 413 425 430 476 434 392
var. tend. % – – – – 11.8 17.9 7.3 2.7 17.0 26.4 42.4 41.1 24.5 5.2 -7.6
Centre val. ass. 479 427 463 529 521 553 501 526 590 562 537 638 660 576 569
var. tend. % – – – – 8.8 29.4 8.1 -0.5 13.1 1.7 7.2 21.2 11.9 2.5 6.0
South val. ass. 1.695 1.597 1.651 1.749 1.897 1.827 1.733 1.719 1.876 1.722 1.686 1.794 1.954 1.895 1.712
var. tend. % – – – – 11.9 14.4 5.0 -1.7 -1.1 -5.7 -2.7 4.4 4.2 10.0 1.5
Discouraged
Total val. ass. 1.317 1.254 1.431 1.393 1.417 1.465 1.428 1.240 1.343 1.270 1.242 1.213 1.357 1.340 1.248
var. tend. % – – – – 7.6 16.9 -0.2 -11.0 -5.2 -13.3 -13.1 -2.2 1.1 5.5 0.5
Males val. ass. 405 363 428 417 445 431 455 403 429 410 426 391 431 464 397
var. tend. % – – – – 10.0 18.7 6.5 -3.4 -3.7 -4.8 -6.5 -3.1 0.6 13.2 -6.8
Females val. ass. 913 891 1.003 975 972 1.035 973 837 914 860 816 822 926 876 851
var. tend. % – – – – 6.5 16.1 -3.0 -14.2 -5.9 -16.9 -16.1 -1.8 1.3 1.9 4.3
var. tend. % – – – – 5.4 25.9 -11.2 -21.6 4.7 -18.6 -20.5 -9.1 -6.4 19.2 11.7
(continued)
181
182
2007 2008 2009 2010

var. tend. % – – – – 8.5 18.7 7.5 -18.9 -3.2 -21.7 -11.3 0.8 3.3 -5.7 -21.4
Centre val. ass. 195 175 219 213 201 213 200 183 168 187 178 171 186 167 175
var. tend. % – – – – 3.4 22.0 -8.9 -14.0 -16.8 -12.3 -10.8 -6.2 11.3 -11.0 -2.1
South val. ass. 857 810 877 858 933 922 908 802 888 818 796 800 892 885 815
var. tend. % – – – – 8.8 13.8 3.5 -6.6 -4.8 -11.2 -12.3 -0.3 0.4 8.1 2.4
Officially employed persons working zero hours during the week due to short-time working compensation
Total val. ass. 59 46 43 48 52 43 48 87 172 233 208 229 201 166 179
var. tend. % – – – – -12.7 -7.5 11.5 82.2 232.7 442.9 335.6 163.8 17.2 -28.5 -13.9
Males val. ass. 40 28 27 32 36 25 27 66 121 173 151 170 137 123 123
var. tend. % – – – – -9.1 -9.0 -1.0 105.5 236.3 585.3 462.2 156.7 12.9 -28.9 -18.7
Females val. ass. 19 19 16 15 16 18 21 21 50 59 57 59 64 44 56
var. tend. % – – – – -20.1 -5.2 33.1 33.6 224.4 238.0 172.6 186.5 27.4 -26.3 -1.2
var. tend. % – – – – -24.5 -25.4 -12.5 85.0 322.4 626.7 360.1 164.4 11.8 -44.1 -15.0
var. tend. % – – – – 28.1 -29.9 168.7 165.4 210.2 890.3 525.0 185.3 27.6 -40.2 -26.7
Centre val. ass. 12 6 6 7 6 6 9 14 25 27 24 38 33 35 32
var. tend. % – – – – -47.6 11.8 50.2 102.3 303.1 326.6 174.1 167.3 30.8 29.3 32.8
South val. ass. 16 14 15 15 16 17 14 19 38 45 52 45 40 39 43
var. tend. % – – – – -0.1 23.2 -10.9 26.7 139.2 165.9 281.6 137.0 5.0 -13.3 -17.9
Unemployed
Total val. ass. 1.556 1.412 1.401 1.655 1.761 1.704 1.527 1.775 1.982 1.839 1.814 2.145 2.273 2.093 1.864
var. tend. % – – – – 13.2 20.6 9.0 7.3 12.5 7.9 18.8 20.8 14.7 13.8 2.8
Males val. ass. 773 676 660 781 847 807 729 899 1.010 937 953 1.102 1.198 1.121 991
(continued)
L. Tronti and R. Gatto
2007 2008 2009 2010
var. tend. % – – – – 9.5 19.4 10.5 15.1 19.3 16.1 30.6 22.6 18.6 19.7 4.0
Females val. ass. 783 737 740 874 915 897 798 877 972 902 861 1.043 1.075 972 873
var. tend. % – – – – 16.8 21.7 7.8 0.2 6.3 0.6 8.0 19.0 10.6 7.7 1.4
var. tend. % – – – – 5.6 24.7 5.8 20.1 35.7 30.8 46.3 36.9 23.9 15.7 -0.8
var. tend. % – – – – 12.7 20.3 3.3 10.5 14.5 30.9 61.1 46.1 33.8 22.4 3.8
Centre val. ass. 273 246 238 309 314 333 292 329 397 348 334 428 441 375 363
var. tend. % – – – – 15.1 35.1 22.8 6.4 26.5 4.5 14.6 30.0 11.0 7.7 8.4
South val. ass. 822 774 759 876 948 888 812 898 950 859 838 949 1.023 971 854
var. tend. % – – – – 15.3 14.8 7.0 2.5 0.2 -3.3 3.2 5.7 7.7 13.0 1.9
Source: Authors’ calculations on Istat, labour force survey data
183
work for the entire reference week, owing to short-time working compensation—
taking this as an indication of benefit recipients working zero hours.11
In the last 3 years, the aggregate grew enormously: from 59,000 individuals in
the first quarter of 2007 to 179,000 in the third quarter of 2010 (Table 9.1). The
biggest jump was in the second quarter of 2009, after which the aggregate con-
tinued to expand rapidly, but at a sharply decelerating pace, that turned into net
decreases in the second and third quarters of 2010.
Table 9.1 shows that zero-hour short-time affects both sexes, but men more
extensively than women. Geographically, the sharpest increase was in the
Northeast. Throughout the period, the highest number of zero-hour beneficiaries
was in the Northwest. The Centre also registered a sharp rise, at rates just below
the nationwide average. The South, due to its weak manufacturing structure, shows
the smallest increase.
9.5.3 The Labour Underutilization Rate
If we count as underutilized labour, on top of the unemployed, those out of work

but receiving short-time working benefits and the discouraged, the number of
persons underutilized in the third quarter of 2007 is 105.2% greater than the
unemployed alone. As the recession advances, however, the number of discour-
aged workers declines, and with it the percentage gap between the official
unemployment rate and the broader measure of underutilization. In any case, total
labour underutilization rose from 2,873,000 in the first quarter of 2007 to
3,495,000 in the third quarter of 2010.
This broader look at the impact of the crisis on the labour market enables us to
construct an underutilization rate counting short-time working compensation plus
discouraged plus unemployed as the numerator, and labour force plus short-time
working compensation as the denominator. It is an indicator similar to the
unemployment rate but considering the broader category of labour underutilization
and consequently enlarging the concept of labour force (Fig. 9.3). This measure is
obviously higher than the official unemployment rate.12 It has been above 11%
since the third quarter of 2007, rising by more than 2.7% points from the second
quarter of 2007 to the third quarter of 2010. It is, however, quite interesting to note
that the difference between the two rates is fairly stable, around 5% points, due to
the compensation between the declining share of discouraged and the hike in the
number of short-time workers.
11
For the time being, as far as we know, no estimates of this phenomenon based on
administrative data are available.
12
A similar rate is produced and diffused quarterly by the Bank of Italy in its ‘‘Bollettino
Economico’’. For the construction details of their ‘‘rate of available unutilized labour’’, see
Brandolini, Cipollone and Viviano (2006).
Undemployment and labour underutilization rates (%)

15.0 7.0
Differences (percentage p.ts)

6.0
12.5
5.0
10.0
4.0
3.0
7.5
2.0
Differences
5.0 ILO unemployment rate
Labour underutilization rate 1.0
2.5 0.0
2007 2008 2009 2010
Fig. 9.3 Unemployment rate by ILO definition and labour underutilization rate—2007 Q1–2010
Q3 (percentage ratios on labour forces; the underutilization rate comprises, further to the ILO
unemployed, the discouraged and workers in zero-hours short-time working). Source: Authors’
calculations on Istat, labour force survey data
9.6 Semi-Employment and Longitudinal Analysis
9.6.1 Fixed-Term Employees and ‘‘Semi-Employment’’
Another important area for investigation is the impact of the recession on fixed-
term employment (fixed-term contracts, temporary workers, seasonal work, etc.).
The time series of fixed-term employees (unlike that for short-time working) has a
clear seasonal component, with a trough in the first quarter and a peak in the
second. To take this into account, our analysis bears on annual averages or four-
quarter changes. The total number of fixed-term employees rose, on a four-quarter
basis, until the third quarter of 2008, dropped in the fourth and registered declines
of more than 9% in both the second and the third quarters of 2009 (Table 9.2). By
the fourth quarter, however, though still contracting, the rate of decline was much
slower, and two of the three quarters of 2010 showed a positive sign.
For almost this entire period fixed-term work was more common among women
than men, and also the sharpest reductions came among women. Regionally, the
greatest number were in the South, which is where the dip in employment was
steepest. Next is the Northwest, which however recorded no fall in fixed-term
employment. The easy termination of fixed-term employment relationships,
however, has not induced firms to a more substantial adjustment in this segment.
Comparing the number of fixed-term positions lost with the increase in zero-hour
186
Table 9.2 Fixed-term employees by sex and region—2007 Q1–2010 Q3 (data not seasonally adjusted; thousands of persons and percentage changes on
corresponding period of previous year)
2007 2008 2009 2010
Total Number 2.126 2.305 2.361 2.282 2.189 2.443 2.406 2.255 2.035 2.214 2.186 2.174 2.047 2.200 2.198
% change – – – – 2.9 6.0 1.9 -1.2 -7.0 -9.4 -9.1 -3.6 0.6 -0.6 0.5
Males Number 1.020 1.093 1.174 1.112 1.043 1.201 1.233 1.101 987 1.066 1.091 1.064 1.018 1.087 1.121
% change – – – – 2.3 9.9 5.0 -0.9 -5.4 -11.2 -11.5 -3.4 3.1 2.0 2.8
Females Number 1.106 1.212 1.186 1.171 1.146 1.243 1.173 1.154 1.048 1.148 1.095 1.110 1.029 1.113 1.077
% change – – – – 3.6 2.5 -1.2 -1.4 -8.5 -7.6 -6.6 -3.8 -1.8 -3.1 -1.7
Northwest Number 485 503 520 518 534 554 552 539 488 528 500 514 495 499 519
% change – – – – 10.1 10.1 6.1 4.1 -8.7 -4.7 -9.4 -4.6 1.6 -5.5 3.8
Northeast Number 433 457 484 453 431 522 509 445 425 457 444 428 434 459 476
% change – – – – -0.4 14.0 5.3 -1.8 -1.4 -12.4 -12.7 -3.7 2.2 0.4 7.2
Centre Number 437 488 478 436 462 483 483 444 404 436 439 446 422 460 427
% change – – – – 5.8 -1.1 0.9 1.8 -12.7 -9.8 -9.1 0.5 4.6 5.5 -2.7
South Number 772 856 879 876 761.0 884.4 862.0 827.7 718.5 793.9 802.0 785.9 694.8 783.5 774.6
% change – – – – -1.4 3.3 -1.9 -5.5 -5.6 -10.2 -7.0 -5.1 -3.3 -1.3 -3.4
short-time workers suggests that, as more resources for income support were
available, firms preferred a mix of solutions in which subsidized labour hoarding
played a decisive role.
Our analysis of semi-employment suggests that the less than predictable fall in
fixed-term employment does not indicate in any way that many of these workers
have a job essentially guaranteed by the possibility of contract renewal at expi-
ration. Rather, fixed-term employment is characterized by high turnover, and the
labour force survey can tell us what happens to those who lose these positions
(Table 9.3). The total increase (2007 Q2–2009 Q2) in non-employment coming
from fixed-term jobs was 31.9%. The increase involved men more than women,
even though women outnumbered men. The sharpest rises were in the northern
regions, though in absolute terms the highest numbers were in the South.
The disproportion between the fall in fixed-term employment and the higher rise
in the non-employment (inactivity plus unemployment) of previously employed
fixed-term workers over the period was due to increased turnover, suggesting a
shortening of the average duration of fixed-term contracts. The non-employed who
lost a fixed-term job became mostly inactive: their number is, all over the period,
about if not more than two times that of the unemployed. But the rates of growth of
the unemployed coming from a fixed-term position are appreciably higher, so that
their share of non-employment shows a significant increase over time (from 30.5%
of 2007 Q2 to 37.4% of 20010 Q2). This evidence is consistent with a picture of
accelerated turnover, in which shorter fixed-term appointments generate increasing
outflows into the unemployment pool more than into inactivity.
9.6.2 Longitudinal Employment and Unemployment
A different way of viewing employment status in a market in which semi-

employment is increasingly important is to examine labour market participation
over time, in a longitudinal framework, thus overcoming the ILO’s limited time
horizon. The ILO’s aim, as we have seen, was to take a sort of snapshot of the
labour market, describing it at a fixed point in time and minimizing as much as
possible the job search period required to qualify as unemployed at the survey
date. But in a market in which a fair proportion of people change their employment
status every year, we cannot measure employment simply by answering the
question ‘‘How many people are employed today?’’ We also need to answer ‘‘How
many people have been employed in the course of the year?’’.13
A longitudinal reading of the survey can extend the time frame for observing
employment conditions without necessarily conducting a new survey. Every
13
We have to note that the ILO itself suggested the concept of ‘‘usually active population’’,
enlarging the temporal horizon of the classic definitions (see Hussmanns, Merhan and
Verma 1990).
Table 9.3 Non-employed persons having lost a fixed-term job, by labour market status, sex and region—2007 Q1–2010 Q3 (thousands of persons and
188
percentage changes on corresponding period of previous year)

2007 2008 2009 2010
Total
Total Number 1.199 1.084 1.221 1.276 1.308 1.199 1.303 1.333 1.503 1.416 1.418 1.442 1.578 1.430 1.526
% change – – – – 9.1 10.6 6.7 4.5 14.9 18.2 8.8 8.2 5.0 0.9 7.7
Males Number 520 434 485 574 589 501 522 601 692 611 613 656 732 650 659
% change – – – – 13.3 15.4 7.7 4.8 17.5 22.0 17.3 9.0 5.7 6.4 7.5
Females Number 679 650 737 702 718 698 781 731 810 806 805 787 847 780 868
% change – – – – 5.8 7.4 6.0 4.1 12.8 15.4 3.1 7.6 4.5 -3.2 7.8
% change – – – – 22.0 32.7 5.8 4.2 32.8 34.5 23.4 14.6 -3.2 -5.9 8.1
% change – – – – 13.0 16.2 6.9 12.6 12.9 37.1 41.0 27.1 22.5 5.9 1.0
Centre Number 203 171 185 205 183 190 214 237 240 224 206 227 242 227 255
% change – – – – -9.7 11.2 16.0 15.6 31.1 18.1 -3.7 -4.3 0.7 1.1 23.7
South Number 686 648 703 718 760 680 734 714 815 745 745 754 851 756 783
% change – – – – 10.9 4.9 4.5 -0.6 7.2 9.6 1.5 5.6 4.3 1.5 5.1
Unemployed
Total Number 378 331 337 413 439 408 387 445 539 485 454 534 594 534 474
% change – – – – 16.2 23.4 15.1 8.0 22.8 18.7 17.1 19.9 10.3 10.1 4.5
Males Number 196 161 160 229 239 208 184 239 297 252 252 281 339 299 256
% change – – – – 21.6 29.0 14.7 4.6 24.5 21.4 37.1 17.3 14.1 18.5 1.6
Females Number 181 170 177 184 200 200 204 206 241 233 202 253 255 235 219
% change – – – – 10.4 18.1 15.4 12.1 20.7 16.0 -0.9 22.8 5.6 1.0 8.2
% change – – – – 37.0 21.4 9.0 28.5 28.6 59.7 50.6 26.7 4.8 -1.3 1.9
(continued)
2007 2008 2009 2010
% change – – – – 14.5 62.9 30.5 27.7 34.2 40.0 46.6 47.3 28.6 24.6 1.3
Centre Number 66 57 49 77 66 78 79 89 104 83 73 101 106 88 82
% change – – – – 0.6 37.6 59.6 14.5 56.5 5.6 -7.3 13.9 2.4 6.8 12.6
South Number 200 185 189 216 231 208 194 204 250 218 209 226 276 245 218
% change – – – – 15.4 12.8 2.4 -5.6 8.1 4.7 8.1 10.9 10.4 12.3 4.1
Inactive
Total Number 821 753 885 863 869 790 916 887 964 931 964 908 984 895 1.052
% change – – – – 5.8 5.0 3.5 2.8 11.0 17.9 5.3 2.4 2.1 -3.9 9.1
Males Number 323 273 325 345 350 293 339 362 395 358 361 375 392 351 403
% change – – – – 8.3 7.4 4.3 5.0 12.7 22.4 6.6 3.5 -0.7 -2.1 11.6
Females Number 498 480 560 518 518 498 577 525 569 573 603 533 592 545 649
% change – – – – 4.1 3.6 3.1 1.3 9.8 15.2 4.5 1.6 4.0 -5.0 7.6
% change – – – – 11.5 41.8 4.1 -11.2 36.3 17.3 8.7 3.4 -9.8 -10.2 12.8
% change – – – – 12.3 1.8 -0.6 6.5 3.3 35.6 38.6 17.4 19.0 -3.5 0.8
Centre Number 137 114 135 128 117 111 135 149 136 141 133 126 136 138 173
% change – – – – -14.6 -2.0 0.1 16.3 16.7 27.0 -1.6 -15.1 -0.5 -2.1 29.9
South Number 485 463 514 502 529 471 541 510 565 527 536 528 574 511 565
% change – – – – 9.0 1.7 5.2 1.5 6.8 11.8 -0.9 3.5 1.6 -3.0 5.5
189
person in the labour force panel, in fact, is interviewed three times in a year.14
Conventionally, employment for a year is measured as the average of the four
quarterly figures. That is, this traditional measure of the employment rate in a
given year is the average of the number of people found to be in employment in the
four quarters as a percentage of the working-age population. But taking semi-
employment into account, we can calculate a different, longitudinal employment
rate as the percentage ratio of those who were employed in at least one of the three
interviews with the working-age population. The comparison of this indicator with
the traditional one reveals the extent of semi-employment, or at least of that part of
semi-employment not picked up in the traditional gauge. In a situation of stable
employment someone who is employed at the first interview will have a high
probability of remaining employed through the year. But in a high turnover situ-
ation, the stock of employed persons will be made up of different people each time
it is surveyed, and more people will experience shorter employment spells. In this
way, taking account how many brief and sporadic episodes of employment there
are, the percentage of the population that is economically active is considerably
higher than conventional indicators suggest. The relationship between the two
indicators then should be: the nearer the standard and the longitudinal employment
rates are, the more stable is the labour market, while the bigger their distance, the
higher is labour market mobility, the higher the turnover and the shorter the spells
of employment.
Next, the longitudinal unemployment rate is the percentage ratio between the
number of persons who were never employed during the year and were counted as
‘‘actively searching’’ (officially unemployed) in at least one survey and the number
who were in the labour force (either employed or unemployed) in at least one
survey. This indicator enables us to analyze the other portion of the labour force,
people who never found even one job during the year, and so to adjust the
unemployment rate for semi-employment, taking account also of those going from
unemployment to inactivity and vice versa. The longitudinal unemployment rate
proposed here may be higher or lower than the traditional yearly average.
If changes of status are more numerous between employment and unemployment
(both within the labour market) than between unemployment and inactivity
(transitions into or out of the labour market), then this longitudinal rate will be
lower than the conventional yearly average; conversely, if transitions between
unemployment and inactivity are more numerous, the rate will be higher than the
conventional one.
14
Actually, each individual who enters the survey sample is interviewed in two consecutive
quarters, skipped for two quarters, and then interviewed again for two more quarters—a total of
four interviews in 15 months, a sampling formula dubbed ‘‘2-2-2’’. We elected to hold the
interviewing period to a year, hence to three observations, because a year is a clear reference and
permits comparison with the traditional indicators expressed as yearly averages. Moreover,
limiting the period to just one year enables us to include half the survey sample, while keeping
the whole 15 months would cut it to a quarter, making the estimates less reliable.
Table 9.4 Yearly average and longitudinal labour market indicators by sex and region—
2007–2009 (per cent)
2007 2008 2009
Total Average employment rate 58.7 58.7 57.5
Longitudinal employment rate 64.5 64.4 63.7
Average unemployment rate 6.2 6.8 7.9
Longitudinal unemployment rate 6.8 7.5 8.0
Males Average employment rate 70.7 70.3 68.6
Females Average employment rate 46.6 47.2 46.4
Northwest Average employment rate 66.0 66.2 65.1
Northeast Average employment rate 67.6 67.9 66.3
Centre Average employment rate 62.3 62.8 61.9
South Average employment rate 46.5 46.1 44.6
The average employment rate fell by more than 1.2% points, from 58.7 to
57.5%, between 2007 and 2009 (Table 9.4). But was the share of Italians who
worked really that low? Counting all those who worked at least once, the pro-
portion of the working-age population in employment for at least part of the
year—the longitudinal employment rate–rose by 5.9 points in 2007, and this
differential—which measures semi-employment not picked up by the conventional
definition—increased to 6.2 points in 2009. The longitudinal rate did fall during
these years, but the decrease was smaller than that in the conventional employment
rate. The difference indicates that there was an increase in the number of persons
working only occasionally (the semi-employed), and who accordingly are not
counted as employed in all the year’s surveys.
Semi-employment (represented by the gap between the two indicators) dimin-
ished among women from 6.1 to 5.9 points. And in fact the average annual
employment rate for women slipped from 46.6% in 2007 to 46.4% in 2009. In reality,
however, more than half of women of working age did work at least some part of the
year, given that the longitudinal employment rates were respectively 52.7 and 52.3%.
That is, the decline in women’s employment was disproportionately steep for those
with occasional work, producing more stable conditions of non-employment. For
men, by contrast, the reduction in employment resulted in more unstable and briefer
employment. The average employment rate fell by a full 2.1 points, from 70.7 to
68.6%, while the longitudinal rate came down by only 1.3 points, from 76.6 to 75.3%.
In the North the disparity between the average and longitudinal indicators is less
pronounced than nationwide, but it nevertheless did increase under the impact of
recession. The Centre recorded lower rates but wider discrepancies. This is the only
Italian region where the longitudinal employment rate rose, even though, as in the
rest of the country, the traditional average rate fell. The gap between the two rates
accordingly widened. The region with the widest gap is the South, where it never-
theless narrowed.
On a nationwide basis, the longitudinal unemployment rate is always higher
than the average one. What this means is that in general Italy records more
transitions between unemployment and inactivity (at the margin of the labour
market) than between employment and unemployment (within the labour market).
Pending better international comparison, this finding casts doubt on the widespread
perception that Italian unemployment is lower than the European average. For it
confirms that the Italian labour market is characterized not only by low partici-
pation but also by an extensive ‘‘grey area’’ between unemployment and inactivity.
This provides additional support for the argument that the international definition
of unemployment does not really fit the Italian labour market. However, a closer
examination of the two indicators shows that for some market segments the lon-
gitudinal unemployment rate is lower than the standard one. In particular, this
applies to men and to the Northwest in all 3 years (2007–2009), and to the
Northeast and the Centre in 2008 and 2009. The exceptions with respect to the
nationwide mean demonstrate the existence of labour supply segments in which
the labour market attachment is however strong, even in times of recession.
9.6.3 Individual Employment Paths
Following the employment history of individuals over the three interviews in the
course of a year offers further interesting insights. One typical path is employment
in all three surveys. It is interesting to compare the individuals in this group with
those who were employed in the first of the year’s interviews. Those employed
steadily through the year fell from 91.0% of those employed at the start in 2007 to
90.8% in 2008 and 90.6% in 2009, a loss of 0.4 points (Table 9.5). So the
recession lowered the probability that someone employed in the first quarter of the
year would also be employed in the fourth. The reduction may be due to
increasingly rare job opportunities and to the shorter duration of jobs.
Table 9.5 Employment status transitions—2007–2009 (per cent)

2007 2008 2009
Percentage of the persons employed in all the three quarters on those 91.0 90.8 90.6
employed in the first quarter
Percentage of the persons employed in the first quarter and not employed in 5.5 5.5 5.7
the last one on those employed in the first quarter
Percentage of the persons employed in a fixed-term job in the first quarter 17.2 18.8 19.4
and not employed in the last one on those employed in a fixed-term job
in the first quarter
Coexistence ratio: persons employed in the first quarter and not employed 104.3 112.3 124.7
in the last as percentage of those unemployed in the first quarter and
employed in the last
The proportion of those who began the year being employed but were non-
employed in the final survey was 5.5% in 2007 and 2008, rising to 5.7% in 2009.
Unsurprisingly, the situation of fixed-term employees was worse. The share of
fixed-term employees observed in the first yearly survey who were not employed
in the last was 17.2% in 2007, 18.8% in 2008 and 19.4% in 2009.
Another interesting indicator is the ‘‘coexistence ratio’’ between those begin-
ning the year employed and ending it non-employed (those leaving employment
during the year) and those who begin jobless and end up employed. In 2007 the
coexistence ratio was 104.3, fairly close to stability, but it rose to 112.3 in 2008—
employment exits thus already significantly outnumbering entries—and jumped
further to 124.7 in 2009, underscoring Italy’s current deteriorated job market.
9.7 The Long Wave of Unemployment and Labour

Underutilization
We have sought to assess the recession’s real impact on the Italian labour market,
going beyond the shortcomings of the standard international definition of unem-
ployment and analysing both unemployment that is hidden (in that the official
statistics do not define it as such) and other labour underutilization phenomena
such as discouragement and labour hoarding. We have also tried to take a closer
look at semi-employment and at the impact of the crisis on the number and
(implicitly) the duration of employment spells.
Quantifying all these aspects of the jobs slump, we can derive an overview of
the current situation. Compared with the pre-recession situation (ignoring time
lags in the different impacts), the official fall in employment was 607,000, while
the number of fixed-term workers fell by 198,000 (quarterly average) and freelance
contracts by 90,000. Adopting the arguments set forth in Sect. 9.4, then, we can
estimate that, actually, more than 500,000 workers left the status of semi-
employment, about a third going into unemployment and the other two thirds into
inactivity. So, the total fall in employment and semi-employment could have been
about 1.100,000. On the other hand, official unemployment increased by 614,000

and hidden joblessness by more than 500,000 (even though the number of dis-
couraged workers narrowly defined fell by 217,000). Finally, the impact of labour
hoarding can be estimated at about 140,000 workers on short-time working
compensation at zero hours of work, net of short-time workers at more than zero
working hours and of labour hoarding without resort to short-time working
compensation (more than 160,000 full-time equivalent workers). All in all, then,
the Italian labour market has to cope with an increase in joblessness broadly
conceived, including the underutilization of labour, of about 1,400,000—more
than twice the rise in official unemployment.
The economy has now been showing signs of recovery for three consecutive
quarters, but there is no hint of improvement in the labour market. Why is this?
Ordinarily in Italy the employment cycle lags behind the economic cycle by two or
three quarters. The lag depends on the mechanisms by which economic activity is
translated into employment, in a series of actions ranging from adjustments in
working hours and overtime to hiring and firing. In a slump as severe as the present
one, however, it is simply unthinkable that this transmission can be completed
relatively quickly. The recovery in employment will be unavoidably slow, because
the return to economic growth requires substantial action by firms to improve
productivity, which has been growing much more slowly than in Italy’s main euro-
area competitors since 1995. And in turn this requires full utilization of labour,
through the progressive reduction of labour hoarding, whose adverse repercussions
on the job market can be avoided only if world and domestic demand for Italian
produce expand rapidly, outpacing productivity. Finally, while firms are reorga-
nizing and, hopefully, reabsorbing underutilized manpower, for years to come the
younger generations coming of age will have trouble finding jobs, and youth
unemployment will expand.
On the hypothesis that the upturn in labour utilization begins in 2011, it is easy
to calculate that excess labour hoarding and short-time working compensation will
still not be superseded before 2012. And as businesses will not begin hiring again
until they have made use of the hoarded labour, unemployment and joblessness
will continue to increase, as those already unemployed in 2010 are joined by new
labour market entrants. So in the next few years the unemployment rate is likely to
rise, as it could only be brought back down to pre-recession levels by particularly
rapid, sustained growth. But this tendency may be anyhow weakened by inactivity,
forced by reduced employment opportunities, that could exert a downward pres-
sure on official unemployment.
9.8 Conclusions and Policy Suggestions
A first look at employment and unemployment shows that, in the Italian case, the
effect of the crisis has been fairly modest, certainly less than the drop in output
would suggest. But a more considered judgment requires us to take account of the
shortcomings of the conventional measurement of unemployment used interna-

tionally (ILO, Eurostat) and try to determine how much joblessness may be hidden
by limiting the definition of ‘‘unemployment’’ to persons who have taken concrete
job search actions in the last 4 weeks. This definition is especially restrictive in a
labour market like southern Italy’s, where the rareness of job opportunities,
especially in recession, may induce the rational unemployed to search for work
less often
Equally problematic is the meaningfulness of the standard measure of unem-
ployment given the increasingly common state of ‘‘semi-employment,’’ i.e. brief
intervals of employment alternating with spells of unemployment or inactivity, and
labour hoarding, i.e. firms’ deliberate underutilization of available labour. In Italy,
labour hoarding is both spontaneous and encouraged by short-time working
compensation incentives.
Our study uses data from the labour force survey to measure the impact of the
crisis on these phenomena. First, the recession increased the number of short-time
working compensation beneficiaries working zero hours in the reference week by
140,000 and the number of non-employed (unemployed and inactive) by 930,000.
So our broad index of involuntary labour underutilization—the conventional
unemployed plus zero-hour short-time working compensation plus discouraged
workers—is considerably higher than the official unemployment rate. This broader
rate was 11.5% in the third quarter of 2007 and 13.5% in the third quarter of 2010.
The increasing importance of all forms of fixed-term work (fixed-term
contracts, temporary employment, seasonal work, freelancers, occasional work,
etc.) creates several issues for the measurement of employment statuses. These
problems consist not only in the risk that the conventional definition may over-
estimate unemployment, but also in a somewhat misleading picture of both
unemployment and employment. Because more and more jobs are temporary, we
now find a range of ‘‘semi-employed’’ positions between those of employed and
unemployed—mutually exclusive under the conventional definition. Since the
official statistics do not envisage this status, people with discontinuous employ-
ment are classified either as employed, or as unemployed or inactive. The real
situation, however, belies this sharp conceptual distinction, and with it the strict
match between the statistical representation of persons and the labour market
aggregates. The employment and unemployment aggregates at any given point in
time no longer identify distinct and relatively stable population groups (the
employed and the unemployed) but only the temporary distribution of employment
statuses within a population consisting increasingly of people who, depending on
the precise time they are interviewed, may be employed, unemployed or inactive.
The longitudinal component of the labour force survey provides a way to
address these issues, because we can observe developments in the labour market
by comparing standard indicators with longitudinal ones specially designed to take
account of semi-employment and the possibility that periods of unsuccessful job
search may also be brief. These are: the longitudinal employment rate (the per-
centage ratio between people employed at least once during the year and the entire
working-age population); and the longitudinal unemployment rate (the ratio
between people who never worked during the year but were formally unemployed
at least once and those who participated at least once in the labour force, either as
employed or jobless).
The principal finding to emerge from this comparison is that the proportion of
the working-age population involved in the production process at some time
during the year was 5.9% points higher than the standard employment rate in 2007
and the gap (a measure of the semi-employment not picked up in the official
statistics) widened to 6.2 points in 2009.
We also used the panel component of the survey to gauge the effects of the
crisis on workers’ employment paths. The analysis focused on the worsening of
employment status during the year for workers who were employed during the first
quarter; the aggregates considered were total employed persons and fixed-term
employees. In 2007, of those employed in the first quarter 91% were employed in
the fourth quarter. This dipped to 90.8% in 2008 and 90.6% in 2009. That is, the
recession made it perceptibly more likely that someone at work in the first quarter
would lose his or her job in the course of the year.
Our quantitative measures show that the problems of the Italian labour market,
though apparently less critical than those of other European countries, will nec-
essarily persist for a number of years to come, until the economy can reabsorb both
the implicit unemployment corresponding to labour hoarding and the additional
joblessness created by the 2008–2009 slump. Even if the job hemorrhage is
staunched in 2011, it will still take at least two more years before existing labour
hoarding is eliminated. Only later on can the economy begin to pare back
unemployment, which will meanwhile have been swollen by young and immigrant
new entrants, and the temporarily inactive re-entering the labour market.15
Consequently, the unemployment rate—even the official rate, which as we have
seen does not fully reflect job market difficulties—is destined to stay high for many
years, and possibly to rise further if employment opportunities open up again. So it
is all the more urgent to reform Italy’s unemployment benefit programmes and
labour policies in general. But, vital as this reform might be, before addressing it,
Italy needs to move resolutely and without further delay to a drastic overhaul that
can put the economy in a position to handle the challenges of new technologies
and global competition. The crisis must be used to usher in a new industrial and
development policy aimed at making Italian firms stronger, more flexible and more
technologically advanced—a policy that can remedy the structural misalignment
of prices and wages between Italy and the rest of Europe, which for so long has
held back Italian growth.16 For the resumption of growth there is no other proper
adjustment variable than the elimination of the rents of sheltered firms and
industries. The economy must enter a new growth path in which higher wages
drive domestic demand and export volumes depend on quality products at
15
For a stock-and-flow econometric analysis of the labour supply in the Italian labour market,
see Di Laurea et al. (2006).
16
On this point see, among others, Tronti (2010).
reasonable prices. To avoid the risk of continuing recourse to flexible labour and
wages as the adjustment factors, which hark back to a no longer practicable
exclusively export-led model, the right course is to build on domestic demand and
wages. On the labour market, this strategy would imply moving in the ‘‘flexin-
surance’’ direction, i.e. providing flexible workers with at least the same social
benefit protection as workers on standard contracts, if not more substantial ones—
as the European Employment Strategy originally intended. Unless it radically
rethinks its development strategy along these lines, Italy will not be able to reduce
unemployment or escape the trap of tight public finance and high taxes.
In addition to an effective industrial and development policy, however, eco-
nomic reorganization requires a coherent system of unemployment benefits,
income support, worker rights and retraining for marketable skills. The two levers
are complementary, as without these programmes sheltered industries can never be
opened up to competition, innovation and competitiveness. If a few words on this
subject can be spent as a concluding remark to a paper devoted to measuring the
amplitude of the long wave of joblessness, above all, the reform of unemployment
benefit programmes requires clarity on the objectives, roles and financial provi-
sions that distinguish public action from that of social partners.
Today, in fact, government action is both too little—excessively selective and
arbitrary, undermining constitutionally guaranteed universality of rights—and at
the same time too much—committed to finance programmes and schemes that
should be mainly if not exclusively the province of private, bilateral collective
agreements. The key principles governing the public interest, as far as working
people are concerned, are income support for people losing their jobs, regardless of
industry or firm size (as well as income for first-job seekers, especially relevant in
the current situation) and programmes for enhancing workers’ human capital. For
firms, the public interest is competitiveness and flexibility in production and in
employment, to permit continuous adaptation to global competition. From these
simple principles it follows that government must finance unemployment benefits
and minimum income, as well as provide employment services and broad policies
for employability addressed both to employed and to jobless workers.
Social partners have different aims and objectives. Firms’ interests are retaining
skilled workers through the ups and downs of the business cycle and avoiding the
opposition of unions to downsizing, job mobility and innovation. Workers have
different interests, namely keeping jobs and incomes during economic downturns.
For this reason such instruments as financed labour hoarding, mobility pro-
grammes and outplacement should be the product of management-labour
bargaining and should be funded by joint insurance schemes. Government inter-
vention in this sphere should be quite limited and always secondary, in support of
the primary role of collective agreements. It should also be limited in time, never
losing sight of the general objective of the competitiveness and flexibility needed
for the economy to quickly respond to the ever changing conditions of
competition.
The reform of Italy’s labour market policies thus requires a corresponding
enhancement of training policies for employable skills, which must be run in
conjunction with income support programmes, making explicit the terms of a

trade-off: government intervention in return for workers’ and businesses’ com-
mitment to contribute, through their effort and investment, to the country’s pro-
gress. Even so, better services to boost employment and employability, along the
lines of the European ‘‘flexicurity’’ model, are a necessary but not sufficient
condition for reorganizing the economy, committing businesses in all industries to
re-engineer the workplace to make for a more streamlined, flexible and innovative
economy. A more rational and efficient system of unemployment benefits needs to
be accompanied by a bold new industrial and development policy designed to
foster economic growth. These are merely two sides of the same coin, and may
prove successful only if launched together.
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Chapter 10
Poverty and Unemployment: The Cases
of Italy and Spain
Tindara Addabbo, Rosa García-Fernández,

Carmen Llorca-Rodríguez and Anna Maccagnan
Abstract This paper sets out to detect the costs of joblessness in Italy and Spain,
two countries that show major differences in labour market structure and in their
reaction to the crisis. We describe the different unemployment insurance systems
in the two countries and how the crisis has hit the two labour markets. A multi-
variate analysis is then carried out to provide an initial estimate of the possible
effects of the current crisis on Spanish and Italian households’ well-being by using
the European Statistics on Income and Living Conditions Surveys for Italy and
Spain. Our results indicate that the unemployed experience a higher degree of
income poverty and costs in terms of people’s reduced likelihood of being able to
access medical or dental treatment and their being able to afford a week’s holiday
in both countries. These costs also change on the basis of people’s employment
status prior to unemployment.
Keywords Poverty Unemployment Well-being Health Crisis

JEL Codes I32 J6 J65
T. Addabbo (&) A. Maccagnan
Dipartimento di Economia, Università di Modena e Reggio-Emilia, Reggio-Emilia, Italy
e-mail: tindara.addabbo@unimore.it
A. Maccagnan
e-mail: anna.maccagnan@unimore.it
R. García-Fernández
Métodos Cuantitativos para la Economía y Empresa, Universidad de Granada, Granada,
Spain
e-mail: rosamgf@ugr.es
C. Llorca-Rodríguez
Departamento de Economía Internacional y de España, Universidad de Granada,
Granada, Spain
e-mail: cmllorca@ugr.es
200 T. Addabbo et al.
10.1 Introduction
The aim of this paper is to analyse the costs of unemployment on household

income and wellbeing in Spain and Italy.1 Both countries are members of the
Eurozone and their labour markets bear both major resemblances and differences.
The two countries are characterised by a high degree of inflexibility in wage
determination, rigidity in hiring and firing practices, and by very low levels of
female labour force participation (World Economic Forum 2010). They both are
characterised by a strong duality: fixed-term versus open-ended contracts, more
accentuated in Spain. The wide use of temporary contracts in hiring young workers
to avoid the much higher dismissal costs of permanent contracts and the deep
recession of the Spanish economy have led its unemployment rate to be twice the
European average. Furthermore, temporary employment accounted for close to
90% of all job losses in the 12 months to June 2009 (European Commission 2009,
p. 16) and the youth unemployment rate in Spain was 41.6% in 2010 versus 27.8%
in Italy and 20.3% in the Eurozone. To make matters worse, Spain and Italy have
employment protection systems in line with the Mediterranean model and are
therefore characterised by a rather low unemployment benefit coverage (Sapir
2005). However, the conditions for the receipt of benefits and the benefits duration
and amounts that they offer differ widely. Hence, their capability to palliate the
socioeconomic consequences of the crisis may differ too.
In this regard, we will consider the effect of joblessness on household income
and wellbeing and the impact of different systems of unemployment benefit on
unemployment sustainability. Our focus is not only on the pecuniary dimension of
well-being, but, in keeping with Sen’s multidimensional definition of wellbeing
(Sen 1985), we shall also take into account indicators of deprivation in other
dimensions of wellbeing.
In 1997 the OECD declared that employment status is the most important factor
in determining relative income and poverty and that direct taxes and public-sector
income transfers substantially reduce income inequality and poverty. Moreover,
there is broad agreement on how experiences such as joblessness may lead to a
deterioration in levels of happiness as well as life satisfaction and health
(Winkelmann and Winkelmann 1995; 1998; Goldsmith et al. 1997; Korpi 1997;
Scutella and Wooden 2008; Schmitz 2010; Economou et al. 2008; Stuckler et al.
2009; Kuroki 2010). Many studies have also shown that socioeconomic status
1
Previous versions of this paper were presented at the IZA/OECD Workshop on ‘Economic
Crisis, Rising Unemployment and Policy Responses: What Does It Mean for the Income
Distribution?’ held in Paris in February 2010, and the AIEL National Conference held at the
University G. D’Annunzio Chieti-Pescara in September 2010. This paper is based in part on the
research for the International Project ‘Measuring interaction between quality of life, children
wellbeing, work and public policies’ supported by the Fondazione Cassa di Risparmio di Modena
(FCRMO). We would like to thank FCRMO for its support, as well as Gianna Giannelli, Daniela
Mantovani, Hans-Dieter Gerner and four anonymous referees for their stimulating comments on
previous versions of this paper. Usual disclaimers apply.
10 Poverty and Unemployment: The Cases of Italy and Spain 201
indicators, such as income, occupation and education, are closely correlated with
morbidity and mortality (Lynch et al. 2000; Mustard et al. 1997 and Humphries
and Van Doorslaer 2000).
In short, our investigation tries to show how unemployment and unemployment
protection systems affect household income, poverty and capacity to meet health
needs in Italy and Spain. For this purpose, we will use data from the European
Statistics on Income and Living Conditions Survey and analyse to what extent
individuals experienced income poverty, had unmet medical or dental needs,
or whose family could not afford a week’s holiday due to their social and eco-
nomic status. Our results could guide decision-making underlying social policies.
The remainder of the paper is organised as follows: Sect. 10.2 addresses the
effect of the economic crisis on the Italian and Spanish labour markets. The third
section analyses their unemployment protection systems. Our findings from the
multivariate analysis on the costs of unemployment in Italy and Spain are shown in
Sect. 10.4. The final section will offer conclusions and suggest policies based on
our findings.
10.2 Italy and Spain: Facing the Crisis
In this section we focus on the effect of the crisis on the Italian and Spanish labour
markets. The comparison between Spain and Italy is of great interest, as their
labour markets bear important resemblances, yet they have been hit very differ-
ently by the crisis. After having examined data taken from the European Labour
force survey for 2007 and 2009, we shall try to explain the reasons for the dif-
ferences in the impact of the crisis on the two economies.
The data in Table 10.1 clearly show a lower level of activity in Italy than in
Spain, both among men and women. The Italian male and female activity rate
remains respectively 4.2 and 12.7% points below the Eurozone 2007 levels, while
male activity rate is 8 points lower than in Spain, and women’s activity rate is
10.7% points lower. As a consequence of the crisis in both countries, male activity
rates have slightly decreased, while female participation rates, particularly in
Spain, have increased.
However, it should be noted that in Italy, female activity rates have increased
only in the North (from 59.7 to 60.4%) and in the Centre (from 55.8 to 57.3%).
In the South, on the other hand, because of poor employment prospects, many
people have stopped looking for a job, and female activity rates have decreased
from 36.6 to 36.1%. In this area male rates have also decreased, from 68.4 to
66.3%.
The data in Table 10.2 compare the employment rates of men and women in
Italy, Spain and in the Euro area for 2007 and 2009. In 2007 these are lowest in
Italy: in particular, female employment rate is 46.6% in Italy, 54.7% in Spain and
58% in the Euro area. Also male employment is lower (70.7%, versus respectively
76.2 and 73.4%). In 2007 Italy and Spain were also characterised by a much higher
Table 10.1 Activity rates, for men and women aged 15–64
2007 2009
M F M–F M F M–F
Italy 74.4 50.7 23.7 73.7 51.1 22.6
Spain 81.4 61.4 20 81 64.8 16.2
Euro area 78.6 63.4 15.2 78.5 64.6 13.9
Source: European LFS
Table 10.2 Employment rates, for men and women aged 15–64
2007 2009
M F M–F M F M–F
Italy 70.7 46.6 24.1 68.6 46.4 22.2
Spain 76.2 54.7 21.5 66.6 52.8 13.8
Euro area 73.4 58 15.4 71.2 58.3 12.9
Table 10.3 Unemployment rates, for men and women aged 15–64
2007 2009
M F F–M M F F–M
Italy 4.9 7.9 3 6.9 9.3 2.4
Spain 6.4 10.9 4.5 17.8 18.5 0.7
Euro area 6.6 8.5 1.9 9.3 9.7 0.4
gender gap in employment than the Euro area, equal to 24.1% in Italy, 21.5% in
Spain and 15.4% in the Eurozone.
The fall in employment during the crisis was much higher in Spain than in Italy:
male employment rates decreased in 2009 to 66.6% in Spain and to 68.6 in Italy;
the female employment rate experienced a less sharp decrease in both countries,
as in 2009 it was 46.4% in Italy and 52.8% in Spain. This led to a decrease in the
gender gap in Spanish employment rates (Table 10.3).
As regards unemployment, it should be noted that female unemployment rate in
2007 was well above the male one, both in the Spanish and in the Italian labour
market. This trait is not so pronounced in the Eurozone. Unemployment rates
increased sharply during the crisis, reaching in 2009 18.5 and 9.3% in Spain and
Italy respectively among women, versus 17.8 and 6.9% among men.
As far as age groups are concerned (Table 10.4), we may see that Italy and
Spain are both characterised by very high youth unemployment rates (those aged
15–24), respectively equal to 20.3 and 18.2% in the year 2007. The Spanish
unemployment rate in this age group was 37.8% in 2009, while in March 2011 it
reached 44.6%.
Italy shows a behaviour pattern closer to that of the Eurozone, although
its unemployment rate for those aged between 15 and 24 was 25.4% in 2009
Table 10.4 Unemployment rates by age group

2007 2009
15–24 25–49 50–64 15–24 25–49 50–64
Italy 20.3 5.8 2.5 25.4 7.4 3.7
Spain 18.2 7.4 6.1 37.8 17.1 18.3
Euro area 15 6.7 6.1 19.7 8.9 6.8
(23.3% for men and 28.7% for women) and reached 28.6% in March 2011. It is
also the age range most affected by job losses in Italy: 8.1% versus 2.7% for those
between 25 and 54 years of age and versus a generation of employment in the
other age group.
It should be highlighted that the unemployment rate falls as the education level
attained by the young people rises, yet in Italy it is higher for those with tertiary
education than for those with an upper secondary and post-secondary level (29.6
versus 24.1% in 2009). Moreover, it should be noted that the percentage of the
population aged 18–24 with at most lower secondary education and not in further
education or training is much higher in Spain than in Italy or in the Eurozone
(31.2% in 2009 versus 19.2 and 15.9% respectively), with a rate lower for women
than for men in all three cases. This fact questions the effectiveness of the Spanish
vocational training model to place young people in employment.
Finally, it should be underlined that some regions are affected by unemploy-
ment with different intensities both in Spain and in Italy. Ceuta, Melilla,
Andalucía, Extremadura and Asturias present unemployment rates much higher
than the national total in Spain, and they are respectively equal to 20.3, 18.2, 12.8,
13.1 and 8.5%, compared to an average rate of 8.3% in 2007. In Italy the Southern
regions suffer more intensely from unemployment, with an unemployment rate of
12.5% in 2009, versus 11.1% in 2007 (in Northern Italy, which is also the richest,
unemployment rates increased from 3.5 to 5.4% over the period analysed).
We have seen that, despite the fact that Italy and Spain are both members of the
Eurozone and are characterised by an employment protection system in line with
the Mediterranean model, the impact of the current economic crisis has been very
different in the two economies.
The reasons for this are diverse. Firstly, the Spanish labour market is charac-
terised by a very high incidence of temporary employment. Since the liberalisation
of temporary hiring in the labour reform of 1984, it increased significantly and in
2007 it was about twice the European and Italian levels (Table 10.5). It should be
noted that the Italian labour market has a lower rate of temporary contracts
compared to the Eurozone but not by a great margin. This different entity of more
unstable employment should entail different costs of joblessness in the two labour
markets (Table 10.6).
Temporary employment is more prevalent among women than men in all cases,
although this gender gap is more pronounced in Spain and Italy than in the Eurozone.
It also affects younger people more, especially those aged between 15 and 24.
Table 10.5 Temporary employment (as a percentage of total employment) by gender

2007 2009
M F F–M M F F–M
Italy 11.2 16.0 4.8 10.8 14.6 3.8
Spain 30.6 33.1 2.5 23.8 27.3 3.5
Euro area 16.1 18.0 1.9 14.3 16.7 2.4
Table 10.6 Temporary employment (as a percentage of total employment) by age group
2007 2009
15–24 25–49 50–64 15–24 25–49 50–64
Italy 42.3 12.2 6.3 44.4 11.6 5.7
Spain 62.8 31 15.3 55.9 25.7 12
Euro area 51.3 14.2 6.8 49.9 12.9 6.3
In particular, in 2007 in Spain 62.8% of young adults were on temporary contracts,

compared to 42.3% of Italians and 51.3% of the Eurozone average. In Spain, tem-
porary employment accounted for close to 90% of all job losses in the 12 months to
June 2009 (European Commission 2009, p. 16). As a consequence, the incidence of
temporary employment dropped to 55.9% in 2009 among young people.
Furthermore, in Spain, manufacturing activities, construction and trade sectors
are those most affected by temporary employment. Moreover, unlike Italy, the
Spanish labour market has been hit by one of the most extreme housing specu-
lation bubbles in the world, leading to heavy job losses in the building sector.
It should also be stressed that in 2009 in Spain, 30.5% of employees with uni-
versity education had temporary jobs, which shows that investment in education does
not protect the workforce against unstable work conditions in this country, with the
same intensity as it does in the Eurozone or Italy (respectively 23.7 and 18.4%).
Another reason why the crisis has hit Spain more hard than Italy is linked to the
fact that in Italy the unemployment increase has been matched with an increase in
the use of wage supplementation funds. This has limited the negative impact of the
crisis on Italian poverty rates (see Addabbo et al. 2010), although the Italian
unemployment insurance system is very heterogeneous and therefore likely to
increase inequality amongst the unemployed.
However, it should be noted that Italian labour market figures are worse than
they appear from the official unemployment rates, according to the ILO definition,
for they do not take into account the unemployed who were not actively seeking a
job in the 4 weeks prior to the interview but who had been seeking work before
(and had then become discouraged). Furthermore, neither are wage guarantee fund
beneficiaries included in the official unemployment figures, as we shall discuss in
the following section.
10.3 Comparison Between the Italian and Spanish

Benefit Systems
Spain and Italy have employment protection systems corresponding to the

Mediterranean model which are characterised by rather low provision of unem-
ployment benefits (Sapir 2005). However, the conditions for the receipt of benefits
and the duration and amounts of the benefits they offer differ. Thus, their capability
to palliate the socioeconomic consequences of the crisis may differ too. This
section aims to show the differences in the two systems also with regard to
employment status prior to the jobless spell, in order to detect the conditions that
are more likely to cause severe cuts in jobless people’s income.
The unemployment benefit system in Italy is characterised by inequalities
derived from differences in the eligibility conditions, and in the different duration
and degree of coverage (Table 10.7). The latter, given the relation of eligibility to
previous employment, is on average low: in 2007, during the first 5 years of
unemployment, the net replacement rate in Italy was on average 7% while the
OECD average was of about 52% (OECD 2009a).
Moreover, the degree of unemployment benefit coverage changes according to
the type of contract, with lower coverage for collaborators and temporary workers
(Bank of Italy 2009a).
In Italy, the number of workers who access the wage supplementation fund has
increased. According to National Social Insurance Institute data, in the second
quarter of 2009 the number of hours paid by the wage supplementation fund
increased by 60% on the first quarter, with the highest increase since 1985 of the
number of employees drawing on this fund, yet who are not statistically computed
amongst the unemployed (Bank of Italy 2009b). The number of the National
Social Insurance Institute (INPS) authorised wage guarantee fund hours to be
increased by 311.4% between 2008 and 2009 (INPS data). The highest increase in
2009 was in the metallurgic sector (+866%) followed by the mechanical (+449%),
woodwork (+425%), trade (+410%), transport and telecommunications (+397%),
mineral and non-metal minerals work (+335%), services (+335%) and extraction
(+328%) (INPS data).
Notwithstanding the recent extension of the wage guarantee fund system, the
Bank of Italy’s simulations on EU SILC and ISTAT labour force survey data show
that about 1.6 million employees or those on collaboration contracts would not
have access to unemployment benefit in case of redundancy or contract inter-
ruption (Bank of Italy 2009a). The simulation by Berton, Richiardi and Sacchi
(2009), based on INPS microdata, shows that between 1.5 and 2 million workers
would not be covered by unemployment benefits if they lost their jobs.
The inclusion of discouraged workers and wage supplementation funds bene-
ficiaries in the pool of unemployed would have increased Italian unemployment
rates in 2009 (second quarter) from 7.4 to 10.2% (Bank of Italy 2010).
On the other hand, in addition to the contributory benefit, the Spanish unem-
ployment protection system includes assistance benefits and the so-called Active
206
Table 10.7 The Italian and Spanish unemployment benefit systems (2008)
Benefit Conditions for receipt Duration Amount
Italy Ordinary Ordinary Requirements: Maximum of 8 months (12 for the 60% of the average gross earnings
unemployment Contributions for at least unemployed aged over-50) received over the last 3 months
benefita 52 weeks during the 2 year period for the first 6 months, 50% for
prior unemployment the 7th month, 40% for the
following months.
Maximum = €1,031.93
Reduced Requirements: At least Number of days previously worked 35% of the average daily wage for
78 days work over the previous up to a maximum of 180 days the first 120 days, 40% of the
year average daily wage for the
following days.
Maximum = €1,031.93
Wage Ordinary: Non-worked hours due to Usually 13 weeks. Maximum 80% of the average gross earnings
suplementation temporary reduction or suspension 12 months over a period of paid for non-worked hours.
funds (cigs)b of activity 2 years Maximum = unemployment
Special: Suspension of activity due to Normally 12 to 24 months. Maximum benefit
sector or area-specific firm 36 months over 5 years
restructuring
Mobility Collective dismissals by firms eligible It depends on the age of recipient and Equal to CIGs for the first
benefits for benefit from the CIGs and on the location of the job. 12 months. Reduced by 20%
individual dismissal of workers after 1 year.
already in CIGs or under Maximum = unemployment
bankruptcy proceedings benefit
(continued)
T. Addabbo et al.
10
Benefit Conditions for receipt Duration Amount

Spain Unemployment Contribution for a minimum of It increases with contribution record. 70% of reference earnings—average
insurancec 360 days in the 6 years preceding Maximum of 720 days. gross earnings over
the legal status of unemployment last 180 days—for a maximum
period of 180 days, then 60%
of reference earnings for the
remaining period.
Maximum = €1356,86
Unemployment Unemployed without any income of In general 6 months. Maximum of 80% of the IPREM (€413,52)
assistanced any kind exceeding 75% of the 18 months (24 or 30 months for
minimum inter-professional wage claimants whose contributory
and in a special social situation benefit has run out and have
family responsibilities)
Active income To meet special social situations like Maximum of 11 months. 80% of the IPREM (€413,52)
for job insertion those of disabled workers.
a
Particular conditions apply for workers in the agricultural and building sector
b
Workers of small manufacturing firms and of most service activities are excluded
c
Particular conditions hold for workers in the agricultural sector
d
Those over 45 who have exhausted their entitlement to contributory benefit for 24 months may receive from 80 to 133% of IPREM
Source: OECD, 2009b
Poverty and Unemployment: The Cases of Italy and Spain
207
Insertion Income. The coverage of contributory unemployment benefit in Spain

varies depending on the contribution made to the system—work days accumu-
lated—and the previous employment status of the unemployed, since the
employee’s contribution base determines the amount of compensation. This is
graduated as time out of work increases. The existing subsidies are linked to
income no higher than 75% of the monthly minimum wage and provide no more
that 80% of PIMEI.2
The AII, introduced in 2000 with the differentiated nature of contributory and
assistance benefits, is a program to support the employability of groups with
special difficulties in entering the labour market and with financial needs, such as
the long-term unemployed, people with disabilities, returnees and victims of
gender violence or domestic violence. In 2010 it consists of a monthly payment of
€426.00, with supplements in certain cases, as well as contributions for the Social
Security to healthcare benefits and family protection.
According to OECD data, the net replacement rate during the first year of
unemployment in 2007 was 69%, with a 5 year average of 39% in Spain compared
to an OECD average of 52% and 28% (OECD 2009a, Table 1.6, p.76). The Spanish
system is, therefore, more generous than the Italian one if we go by this criterion.
In the first quarter of 2010 the number of beneficiaries of the assistance level of
unemployment protection system in Spain increased by 82.5% over the same period
in 2009. However, those covered by contributory benefits had dropped by 1.7%. The
annual increase in the total beneficiaries of the protection system as a whole—
contributory benefits, assistance benefits and Active Insertion Income—was 47.8%
in 2009. Of these, 13.86% were foreigners benefiting mainly the contributory level,
although the assistance level and the Active Insertion Income additions were at their
highest since 2008. In 2009 the coverage rate of the Spanish system of unemployment
protection was 75.48% (Spanish Ministry of Labour and Immigration).
By sector of activity, the highest rates of yearly change in the first quarter of
2010 were recorded in Agriculture and Services on the contributory level, and in
Construction and Industry on the assistance level (Spanish Ministry of Labour and
Immigration). This was to affect levels of income inequality, income poverty and
wellbeing in Spain since the current crisis has negatively affected these sectors of
activity more intensely.
It should be stressed that, according to the OECD (2009a, pp. 62–63), labour
market program spending—both in Italy and in Spain—is comparable with that of
the countries with a strong aggregate employment performance, but more
weighted towards passive benefits. According to Eurostat 2007 data on labour
market policies (Eurostat 2009, Table B.1.2 p.13), support for labour market
policies in 2007 amounted to an average of 60.8% in the EU-15 countries, with an
estimate of 66.8% in Spain and 63.7% in Italy.
2
Public Indicator of Multiple Effect Income replaced the minimum wage on July 1, 2004 as a
benchmark for social security benefits, but the conditions of access and maintenance are still used
for reference.
Having assessed the extent of unemployment in the two countries by using

descriptive statistics and the differences in the unemployment benefit systems, the
aim of the following section is to analyse the costs of unemployment in Italy and
Spain in order to infer the costs of unemployment in the current crisis.
10.4 The Effect of Joblessness on Household Income

and Wellbeing
In this section we show the results of multivariate analyses carried out to estimate
the effect of joblessness on household income and wellbeing and the impact of
individuals’ previous employment status (and relative unemployment benefits) on
their unemployment sustainability. Our focus is not only on the pecuniary
dimension of wellbeing, but also on the socio-economic impact of unemployment.
It is worth noting the social impact of high unemployment rates: they imply a
decrease in purchasing power, a loss of human capital and the so-called discour-
aging effect on the long-term unemployed (Berger et al. 2009, p. 14), their social
costs being broad (Sen 1997a, b). This analysis allows us to make an initial
estimate of the possible effects of the current crisis on Italy and Spain. We test
whether the differences between the two countries are statistically significant by
applying a Hausman-White Test (White 1994) on the set of coefficient variables
common to the two countries. In particular, if we use the suest STATA command
proposed by Weesie (1999), which computes a Seemingly-Unrelated Cluster-
Adjusted Sandwich-Estimator, we find that the coefficients of the predictor vari-
ables statistically differ between the two countries.
One direct cost of unemployment is loss of income. Italian unemployment ben-
efits are very fragmented and this can produce different costs according to one’s prior
employment status. The OECD (2009a) analysis on the ability of the social transfer
system to alleviate poverty indicates that in Italy the alleviation of poverty focuses
more on jobless householders than on working households. In Spain the impact of
social transfer on the poverty rate is neutral toward these two groups.
Preliminary results indicate an increase in the number of households that have
experienced great difficulties in making ends meet (17% in 2008 against 15.4%
in 2007); with worse figures in the South of Italy (from 22% in 2007 to 25.6%
in 2008) whereas it is stable and lower in the Centre (14.3%) and North (12.6%)
(ISTAT 2009c). The results of the EU SILC-European Union of Statistics on
Income and Living Conditions for Spain (ES SILC 2007) point to an increase in
the number of households with difficulties in making ends meet from 10.3% in
2007 to 12.2% in 2008.3
3
We do not include geographical areas disaggregation for Spain because the first level of
disaggregation of Eurostat (nuts) does not reflect the heterogeneity of the Spanish labour market.
To obtain significant results we should refer to the eighteen autonomous communities plus the
two autonomous cities. This will be the task of a future paper.
We extend our analysis to the increased probability of the unemployed being

poor in terms of income. For this purpose we estimate a probit model using IT
SILC 2007 and ES SILC 2,007 microdata (Table 10.8).4 Income poverty increases
for those who are unemployed.5 In Italy, the effect of being unemployed on income
poverty is higher for those unemployed who were previously self-employed,
whose probability of being income poor increases by 47% if they were previously
self-employed with employees and by 34% if they were self-employed without
employees, followed by those never employed before (+23%) and by those who
were previously employees (+14%). Taking current employment status into
account, we may see that the probability of income poverty significantly increases
by 13% if they are self-employed without employees, and by 6% if they are self-
employed with employees. The higher income poverty probability for the currently
self-employed may be connected both to income underreporting and to the
inclusion in the group of self-employed without employees of those who are in
non-standard collaboration working positions facing lower levels of income.
A lower but still significant effect is connected to temporary work that is found to
increase the probability of poverty by 9%.
In the Spanish case (see Table 10.8) the probability of being income poor sig-
nificantly increases among those who have never worked before (40%). Poverty
increases also among the unemployed who have previously been self-employed with
employees (45%) and by 27% if they were self-employed but without employees.
The same considerations as in the Italian case could be made about the income
underreporting and the inclusion of non-standard collaboration working positions in
the group of the self-employed.
The individuals who were formerly employees present a lower probability than
the former of being below the poverty threshold. Nonetheless, their probability of
being below the poverty threshold increases by 21%. The probability of being
income poor also increases for the inactive (15%) and the effect is significantly
higher than in Italy (5%).
By comparing the marginal effects of different education levels in the two
countries, we may see that higher education protects more against the risk of
income poverty in Italy than in Spain. Turning to the current work situation, part-
time work increases the probability of poverty in Spain (+4%) whereas it decreases
the probability of being poor in Italy (-8%). The latter may be connected to the
greater spread of part-time work in Northern Italy, where household income is on
average higher and part-time work is more often chosen by women for family
reasons. In Spain, 59.1% of part-time workers accept positions with lower wage
4
For this purpose we estimate probit models, as they may be considered an appropriate response
model when the dependent variable is dichotomous. Our response probability is included in the
[0,1] interval, and it is defined as the standard normal cdf of a linear function of the independent
variables (Greene 2008).
5
Income poverty is defined in terms of equivalised disposable income being less than the
poverty threshold -60% of median equivalised disposable income. Equivalised total disposable
household income is obtained by using the modified OECD equivalence scale.
Table 10.8 Probability of being income poor in Italy and in Spain

Italy Spain
Income Marginal Income Marginal
poor Effects poor Effects
Age 0.044** 0.009 0.025** 0.005
(5.88) (3.33)
Age squared -0.001** 0.0001 - 0.0003**
0.00007
(6.73) (4.26)
Female -0.067* -0.014 -0.046 -0.009
(2.38) (1.64)
Married or cohabiting -0.189** -0.041 -0.087* -0.017
(4.54) (2.31)
Sep. Divorced 0.249** 0.059 0.293** 0.065
(4.39) (4.37)
Widow 0.046 0.010 -0.466** -0.066
(0.52) (4.34)
Secondary -0.272** -0.055 -0.188** -0.034
(6.79) (5.27)
High school -0.611** -0.122 -0.428** -0.072
(14.74) (11.09)
Tertiary -1.054** -0.141 -0.655** -0.104
(16.71) (16.05)
Part-time -0.375** -0.080 0.197** 0.041
(7.32) (3.95)
Temporary contract 0.371** 0.092 0.267** 0.055
(8.53) (8.62)
Self-employed with employees 0.254** 0.061 0.860** 0.244
(3.90) (13.67)
Self-employed without employees 0.494** 0.128 0.844** 0.230
(12.38) (19.67)
Unemployed previously self-employed with 1.367** 0.466 1.378** 0.452
employees
(3.53) (2.84)
Unemployed previously self -employed 1.041** 0.336 0.915** 0.269
without employees
(7.24) (4.16)
Unemployed previously employee 0.507** 0.136 0.767** 0.206
(7.06) (16.57)
Unemployed never employed before 0.759** 0.225 1.258** 0.402
(8.96) (12.16)
Inactive 0.242** 0.053 0.658** 0.148
(4.76) (19.64)
Chronic ill 0.051 0.011 0.001 0.0002
(1.38) (0.04)
At least one child aged less than 5 0.279** 0.066 0.103 0.021
(6.79) (1.95)
(continued)

Italy Spain
Income Marginal Income Marginal
poor Effects poor Effects
At least one child aged from 6–14 0.259** 0.060 0.205** 0.043
(8.19) (5.31)
At least one child aged 15–17 0.311** 0.075 0.193** 0.041
(8.72) (3.09)
South 0.771** 0.185
(30.06)
Constant -1.663** -1.596**
(11.02) (11.15)
Observations 33,423 33,423 28,063 28,063
Robust z statistics in parentheses
*
significant at 5%; ** Significant at 1%
Source: IT-SILC 2007 and ES-SILC 2007
levels: elementary occupations (33.22%) and services/marketing sales workers

(25.9%).
We also find that the presence of children in the household increases the
probability of being income poor in both countries: this probability being higher in
Italy than in Spain.
Finally, in Italy, living in the South increases the probability of poverty by 19%.
The South of Italy, in fact, is characterised by deep-seated social and economic
problems, such as poor economic development, lack of infrastructure, high and
long-term unemployment. As a consequence of this, the probability of being
income poor is much higher in this part of the country.
In order to account for different dimensions of the costs of joblessness in the
two countries, we analysed the probability of having unmet medical or dental
needs. Previous studies have outlined the relevance of the non-pecuniary costs of
joblessness (Sen 1997b; Winkelmann and Winkelmann 1998) including the costs
connected to poorer mental and physical health, with an increase in costs con-
nected to the spell of unemployment and significant differences according to
gender and the previous type of job (Sen 1997b; Paul and Moser 2009).
We estimated a Probit model with the probability of not having access to
medical or dental visits or treatment as a dependent variable, being considered too
expensive according to the EU SILC microdata for the two countries.
The results of our estimate are shown in Table 10.9. The unemployed have a
higher probability of not having access to medical or dental visits or treatments
since they are considered too expensive in both countries, and the result differs on
the basis of previous employment status. In Italy the group of unemployed who see
the highest increase in this cost of unemployment is made up of those unemployed
who were previously self-employed without employees (+9%), whereas in Spain
the ones who bear the highest cost (considering their employment previous to
current unemployment status) are those who were never employed before the
Table 10.9 Probit model on the difficulties in accessing medical and dental visits-treatments in
Italy and in Spain
Italy Spain
Health Marginal Health Marginal
difficulties Effects difficulties Effects
Age 0.019* 0.002 0.040* 0.002
(2.18) (2.38)
Age squared -0.0002 -0.00002 -0.0004* -0.00002
(1.48) (2.36)
Female 0.078* 0.009 -0.027 -0.001
(2.42) (0.54)
Married or cohabiting -0.023 -0.003 0.027 0.001
(0.48) (0.32)
Sep. Divorced 0.254** 0.035 0.439** 0.031
(3.91) (3.93)
Widow 0.236* 0.033 0.012 0.001
(2.54) (0.08)
Secondary -0.172** -0.019 -0.041 -0.002
(3.74) (0.76)
High school -0.330** -0.037 -0.352** -0.014
(6.90) (5.61)
Tertiary -0.765** -0.057 -0.552** -0.021
(11.35) (6.33)
Part-time -0.167** -0.019 0.110 0.006
(2.98) (1.34)
(4.66) (4.12)
Self-employed with employees -0.400** -0.035 -0.181 -0.007
(4.81) (1.20)
Self-employed without employees 0.085 0.010 -0.056 -0.003
(1.79) (0.61)
Unemployed previously self-employed 0.136 0.017 -0.061 -0.003
with employees
(0.31) (0.14)
Unemployed previously self -employed 0.515** 0.087 0.436 0.032
without employees
(3.48) (1.05)
Unemployed previously employee 0.259** 0.036 0.361** 0.024
(3.32) (4.67)
Unemployed never employed before 0.028 0.003 0.629** 0.056
(0.26) (4.16)
Inactive -0.197** -0.022 0.123** 0.006
(3.39) (1.99)
Chronic ill 0.457** 0.068 0.368** 0.023
(12.75) (6.78)
At least one child aged less than 5 0.043 0.005 -0.149 -0.006
(0.89) (1.45)
(continued)

Italy Spain
Health Marginal Health Marginal
difficulties Effects difficulties Effects
At least one child aged from 6–14 0.142** 0.017 -0.114 -0.005
(3.85) (1.53)
At least one child aged 15–17 0.200** 0.026 -0.261* -0.010
(4.67) (2.06)
South 0.191** 0.023
(6.51)
Constant -1.876** -2.793**
(10.82) (8.52)
Observations 33,423 33,423 28,063 28,063
*
Significant at 5%; ** significant at 1%
Source: IT-SILC 2007 and ES-SILC 2007
unemployment spell (+6%). Note that for the inactive the probability of having
unmet health needs decreases in Italy, again probably showing a higher role of
protection played by the family, which however, does not entail the youngest
children. In fact the risk of having unmet medical and dental needs increases in
Italy with the presence of children aged over six whereas the reverse holds true for
Spain, and this should be borne in mind when assessing child wellbeing in terms of
health status in the two countries.
In order also to take other dimensions of wellbeing into account, we examined
whether households can afford to pay for a week’s annual holiday away from home
regardless if they want. This event may be considered a deprivation resulting in a
lower development of the ability to take care of oneself and enjoy culture and the
environment. The unemployed are more likely to be exposed to the risk of living in
households unable to afford a week’s holiday in both countries, and in Spain this
event is more frequent for the unemployed who were never employed before
(29.5%) while in Italy this event is more likely for the unemployed who were
previously self-employed. In both countries being employed as a temporary
worker increases the likelihood of not being able to afford a week’s holiday away
from home by about 11% (Table 10.10).
10.5 Conclusions
As a result of the current crisis, the Italian and the Spanish labour markets have
experienced an increase in unemployment rates. The financial crisis has inflicted
extreme hardship on the Spanish labour market, especially in the last quarter of
2008 and the first of 2009. As a result of the heavy job losses suffered, especially
Table 10.10 Probability of not being able to afford a week’s annual holiday away from home
Italy Spain
No Marginal No Marginal
holiday Effects holiday Effects
Age 0.026** 0.010 0.028** 0.010
(4.30) (4.28)
Age squared -0.0004** -0.0001 -0.0004** -0.0001
(5.06) (5.17)
Female -0.022 -0.008 -0.036 -0.013
(1.02) (1.54)
Married or cohabiting -0.167** -0.062 -0.282** -0.102
(5.36) (8.81)
Sep. Divorced 0.138** 0.052 0.342** 0.130
(2.94) (5.78)
Widow 0.092 0.035 -0.230* -0.078
(1.21) (2.48)
Secondary -0.250** -0.091 -0.270** -0.094
(7.23) (8.67)
High school -0.668** -0.237 -0.620** -0.203
(19.06) (18.62)
Tertiary - 1.260** - 0.343 - 1.055** - 0.323
(26.89) (29.96)
Part-time -0.171** -0.063 0.111** 0.040
(4.21) (2.62)
(8.50) (11.93)
Self-employed with -0.447** -0.149 -0.291** -0.097
employees
(8.31) (4.43)
Self-employed without -0.001 -0.0005 -0.034 -0.012
employees
(0.04) (0.86)
Unemployed previously 0.913* 0.351 0.100 0.037
self-employed with
employees
(2.35) (0.26)
Unemployed previously 0.680** 0.266 0.510* 0.197
self -employed without
employees
(3.43) (2.40)
Unemployed previously 0.450** 0.175 0.569** 0.219
employee
(6.94) (13.48)
Unemployed never employed 0.390** 0.152 0.759** 0.295
before
(4.87) (6.87)
Inactive -0.019 -0.007 0.075** 0.027
(continued)

Italy Spain
No Marginal No Marginal
holiday Effects holiday Effects
(0.45) (2.59)
Chronic ill 0.240** 0.091 0.320** 0.120
(8.34) (11.64)
At least one child aged less than 5 0.011 0.004 -0.004 -0.001
(0.33) (0.08)
At least one child aged from 6–14 0.026 0.010 0.015 0.006
(0.98) (0.44)
At least one child aged 15–17 0.110** 0.041 0.010 0.004
(3.60) (0.18)
South 0.769** 0.289
(36.04)
Constant -0.430** -0.377**
(3.53) (3.04)
Observations 33,423 33,423 28,063 28,063
*
significant at 5%; ** Significant at 1%
by men, the Spanish labour force has shrunk slightly, and the rate of youth
unemployment was 37.9% in 2,009.
Although the impact of the recession has been more severe in Spain, the Italian
data on unemployment must be complemented with data on the beneficiaries of
wage supplementation fund (who are not computed among the unemployed) to
assess the effect of the crisis on the labour market more completely. Moreover, one
should also take into account the high percentage of people of working age who
have been discouraged from undertaking active job-hunting and are therefore not
calculated in official unemployment figures. The latter should not be neglected by
public policies designed to increase participation in the labour force in the two
labour markets. The share of those not actively seeking work is especially high in
Italy amongst women and in the South.
Economic literature has widely examined the link between unemployment,
income inequality, poverty and wellbeing. Interest in this subject increases in the
wake of economic recessions, given the negative effects they have on labour
markets. As microdata on household income for the year 2009 are not yet avail-
able, we try to infer the costs of the current crisis through an analysis of the
socioeconomic costs of unemployment by using the EU SILC microdata available
for the two countries.
Our results indicate that the unemployed experience a higher degree of income
poverty and costs in terms of the reduced likelihood of accessing medical or dental
treatment or of being able to afford a week’s holiday away from home in both
countries. Costs also change according to employment status prior to unemploy-
ment. When we consider the state of employment prior to the individual becoming
unemployed, we see that in Italy the higher risk of being poor is connected to being
previously self-employed, while for the Spanish the probability of poverty
increases more if the person has never been employed before. This difference may
be connected to the higher role of protection played by the family of origin in Italy
than in Spain, and this may also explain part of the higher effect of inactivity on
income poverty in Spain.
The unemployment insurance system in Italy is characterised by inequalities
deriving from differences in the conditions of eligibility and in the different
duration and degree of coverage according to the type of contract. The coverage of
contributory unemployment benefits in Spain varies depending on the contribu-
tions made to the system—work days accumulated—and on the prior employment
status of the unemployed, so it protects young people with less intensity, making
them those most punished by unemployment. Spanish subsidies are linked to the
possession of income no higher than 75% of the monthly minimum wage and
provide no more that 80% of PIMEI. Finally, Spanish unemployment protection is
more generous than the Italian one if we measure it as shown in OECD data. The
net replacement rate during the first year of unemployment in 2007 was 69% with
a 5 year average of 39% in Spain compared to 37% in Italy with a 5 year average
of 7%.
Together with social policies aiming to provide jobless people with better
access to health services,6 we believe that the two countries’ unemployment
protection systems need to be reformed. They do not produce relatively high
employment rates nor do they keep the risk of poverty relatively low compared to
other European systems. The extension of Wage Supplementation Fund access in
Italy and the introduction of the Program for Temporary Unemployment Protec-
tion and Integration in Spain, which were measures taken as a reaction to the crisis,
prove this.
The choice of the exact measures to adopt will require further analysis and
simulations to identify those most suited to the characteristics of the two countries,
and this will be the object of future works.
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World Economic Forum (2010) The Global Competitiveness Report 2010–2011. Geneva
Chapter 11
Labour Market Transitions During
the Financial Crisis in Italy
Marco Lilla and Stefano Staffolani
Abstract The aim of this paper is to evaluate the consequences of the financial
crisis on the Italian labour market by analysing the determinants of individuals’
transitions between occupational states. For this purpose, we use micro-data from
the ISTAT Labour Force Survey, a repeated cross-section dataset.
In order to identify the determinants of transitions, two strategies are followed:
firstly, we consider the ‘‘perceived’’ employment condition, available at the
individual level for the previous year. Then, following the ‘‘ecological inference’’
approach, we get quarterly transition probabilities for the ‘‘official’’ employment
condition.
The economic crisis has mostly penalized young, migrants, men, and people
living in the North as well as couples without children and single parents with
children.
Keywords Crisis Transitions Unemployment Ecological inference

JEL Codes J23 J63
11.1 Introduction
The financial crisis has strongly affected labour market performances. In this
paper, we intend to evaluate the consequences of the crisis on the different seg-
ments of the Italian labour market, by analysing the transition probabilities
M. Lilla (&) S. Staffolani

Dipartimento di Economia, Università Politecnica delle Marche,
Piazzale Martelli n. 8, 60121 Ancona, Italy
e-mail: m.lilla@univpm.it
S. Staffolani
e-mail: s.staffolani@univpm.it
222 M. Lilla and S. Staffolani
between the employment conditions of individuals, before and after the economic
crisis. Our purpose is to identify the individuals whose employment perspectives
have been more deteriorated by the crisis, i.e. the most vulnerable individuals in
the Italian labour market.
The effects of the financial crisis on the employment perspectives have been
recently analysed in various economic papers for several countries. Mossfeldt and
Österholm (2010) estimate the effects on the Swedish labour market, and they
conclude that the NAIRU will be in equilibrium again in 2013. Boysen-Hogrefe
and Groll (2010) investigate the German labour market during and after the
recession. They argue that the pronounced wage moderation before the crisis and
the flexibility in adjusting working time during the crisis is the reasons for the very
good performance of Germany. Arpaia and Curci (2010) analyse the labour market
adjustment to the 2008–2009 recession in terms of employment, unemployment,
hours worked, and wages for all EU Member States. They evaluate the effects on
the employment rate by considering the increase in the job separation rate and the
decline in the job finding rate. Another interesting contribution is proposed by
Choudhry et al. (2010). The Authors, after a review of the economic literature
concerning previous crisis, conclude their econometric investigation by saying
that: ‘‘Financial crisis impact on labour market indicators is significant: it nega-
tively affects the employment rate and worsens the situation of the unemployment
rate’’.
The Italian Statistical Institute (ISTAT 2010b) points out that young people
have suffered more from the crisis, mainly because they show the highest prob-
ability of being employed on a temporary basis (Berton et al. 2009). However, the
question remains if other categories of individuals, outside young people, have
seen their probabilities of finding or of loosing a job worsened because of the
crisis, and if there are any categories of individuals which have not been affected at
all by the crisis.
Therefore, we will analyse employment state transitions at the turn of the crisis.
In Italy, labour market data available in real time are unfortunately scarce. The
only dataset available for our purposes comes from the ISTAT Labour Force
Survey (Rilevazione Continua delle Forze di Lavoro, RCFL). This survey, which
concerns about 170,000 individuals interviewed each quarter, allows researchers to
use micro-data with a four months delay. In the survey, a panel dimension exists.
Each household is interviewed four times, with a rotation scheme of quarter’s
presences, absences and presences. Unfortunately, because of the Italian Privacy
Law, ISTAT is not allowed to provide researchers with a constant identifier of the
family and of the individual, so that the use of the panel structure is limited to
ISTAT researchers.1
1
A longitudinal database is developed by ISTAT, but at the time we began to write this paper,
the database was updated to the beginning of 2007. See Discenza and Lucarelli (2009) and
ISTAT (2010a).
11 Labour Market Transitions During the Financial Crisis in Italy 223
In order to analyse transitions we therefore need some other information or to

use some different methodology than the standard ones, based on transition matrix
built at the individual level.
We use two different approaches. In the first one, presented in Sect. 11.2, we
exploit the questions of the survey referring to the backward employment condi-
tion,2 where individuals were asked about their employment condition one year
prior to the survey. This information allows us to recover yearly transitions that,
unfortunately, must be based on the perceived (self-declared) employment
condition.
Furthermore, given that the Italian labour market is characterised by a social
shock absorber named ‘‘Cassa Integrazione Guadagni’’ (CIG),3 we will also
present some figures on individuals employed in firms in crisis, working for a
reduced number of hours or not working at all.
The second approach, presented in Sect. 11.3, is based on the methodology of
‘‘ecological inference’’, that allows us to estimate transitions among occupational
states at aggregate group levels, where groups are defined by individual or family
characteristics (King 1997; King et al. 2004).
We also investigate on household size and composition, by considering indi-
viduals belonging to different family types.
The main conclusions of our work seem to suggest that the crisis worsened the
labour market conditions of those individuals who had better labour market per-
formances, i.e. males, immigrants, individuals living in the northern regions of
Italy.
11.2 Labour Market Transitions
11.2.1 Perceived Versus Official Labour Market Status
In the introduction we explained the reasons why the empirical analyses presented
in this section are based on perceived employment condition instead of on the
official definition.4
Differences between the two definitions need to be stressed. Whereas the former
is based on self-declaration, the latter is based on a complex evaluation of the
effective status of each individual, depending on a series of questions asked to the
2
We refer to Sect. 11.1 of the questionnaire.
3
It is a sort of almost temporary layoff with a wage compensation mechanism, which preserves
(juridically and statistically) the employment relationship, even if there is no possibility for the
worker to re-entering the firm. Employees in small firms had also enjoyed CIG thank to the
institute of ‘‘Cassa Integrazione in deroga’’.
4
We remind that information at time t and at time t - 1 are available for the perceived
employment condition but not for the official one.
Employment rate: official-perceived Unemployment rate: perceived-official
Fig. 11.1 Differences between ISTAT (official definition) and perceived (auto-declared)
respondents,5 so that perceived and official employment conditions may strongly

differ for discouragement effect, underemployment, unpaid work and other
reasons.
Figure 11.1 highlights how these differences can be relevant at a geographical
level, by showing the map of the Italian regions. In the left panel, the difference
between the official employment rate and the perceived employment rate is shown.
This difference is positive for all the regions, so that the perceived employment
rate is lower with respect to the official one in every Italian region. Differences
range from 0.5 to 2% points. However, the difference seems to be widespread over
Italy.
The differences between the perceived unemployment rate and the official
one are in the right panel of Fig. 11.1. Note that perceived unemployment
regional rates are considerably higher than the official ones: the difference ranges
from 2.4 to 20% points and the highest values concern the regions of the South
of Italy.
Figure 11.1 therefore highlights that the official definition raises the probability
of being employed and reduces the probability of being unemployed with respect
to the perceived one, and that the following empirical analyses can produce
different results given that they are based on different definitions.
5
Have you worked at least one hour during the last week? Have you made at least one effective
action in order to find a job during the last month? The official employment condition complies
with the Council Regulation (EC) No. 577/98 of 9 March 1998 on the organisation of a labour
force sample survey in the European Community.
Table 11.1 Transitions between employment and unemployment

Unemployment to employment Employment to unemployment
yearly transitions yearly transitions
1 2 3 4 5 6
2007–2008 2008–2009 Difference 2007–2008 2008–2009 Difference
Males 27.4 22.9 -4.4 2.5 3.7 1.2
Females 24.8 21.6 -3.2 3.1 4.0 0.9
Immigrants 44.4 29.2 -15.2 4.7 7.2 2.5
Italian citizens 24.8 21.6 -3.1 2.5 3.5 1.0
15–24 29.8 23.7 -6.0 6.7 9.7 3.0
25–34 28.9 24.8 -4.2 3.7 4.8 1.1
35–44 25.1 23.5 -1.6 2.5 3.8 1.3
45–54 21.6 17.0 -4.6 1.9 2.8 0.9
55–64 12.6 11.5 -1.2 1.5 2.2 0.6
Primary 15.4 14.8 -0.6 3.9 5.7 1.7
Lower secondary 24.5 20.1 -4.4 3.3 4.8 1.5
Secondary 30.3 24.7 -5.6 2.3 3.3 1.0
Tertiary 32.0 32.1 0.1 1.8 2.1 0.3
North–West 41.0 30.1 -10.8 2.1 3.3 1.2
North–East 47.9 31.0 -17.0 1.6 3.0 1.4
Center 34.7 29.2 -5.6 2.7 3.4 0.6
South 17.8 18.4 0.5 4.1 5.1 1.0
Islands 18.7 16.3 -2.4 4.6 5.8 1.2
Singles 26.8 18.4 -8.4 2.6 3.5 0.9
Couples without 28.1 24.4 -3.7 2.1 3.5 1.3
children
Couples with 26.6 23.3 -3.3 2.6 3.6 0.9
children
Single parents with 26.3 19.9 -6.4 3.5 5.4 1.9
children
Others families or 20.8 20.1 -0.7 4.4 6.0 1.6
NA
Permanent 1.9 2.7 0.8
Temporary 10.8 15.8 5.0
Self-employed 1.4 1.7 0.3
11.2.2 Transition Probabilities
Table 11.1 presents the yearly transition probabilities, respectively from unem-
ployment to employment and from employment to unemployment, for different
groups of individuals belonging to different family types. Observations are divided
in the pre-crisis period (2008, that means all the surveys conducted from the first to
the third trimester 2008) and in the post-crisis period (all quarters for 2009,
including the fourth quarter 2008) and differences between the pre and post-crisis
periods transition probabilities are represented in the last column.
Columns 1–3 of Table 11.1 show that the probability of finding a job at
time t conditional on being unemployed at time t - 1 has decreased for each group
we considered, except for people living in the South and for more educated
individuals.
Young, northern, more educated individuals, males and immigrants show higher
probabilities offinding a job in both periods. In the post-crisis period, the probability of
finding a job for the unemployed decreases more for males, immigrants, young, those
aged between 45 and 54, individuals with secondary education, those living in the
North–East. Considering the family types (Singles, Couples without children, Couples
with children, Single parents with children, Other or N.A), the probability of finding a
job has decreased the most for Singles and for Single parents with children.
In general, it seems that the crisis has mostly reduced the probability of finding
a job for those categories who used to find a job more easily before the crisis, such
as males, immigrants, young and northern individuals.
We now turn to the descriptive analysis of the probability of losing a job at time
t conditional on having been employed at time t - 1. Columns 4–6 of Table 11.1
show that this probability increased after the crisis for all the groups. Males,
immigrants, young and less educated individuals faced a major increase. The
center of Italy faced the crisis with a lower waste of jobs. Temporary workers, that
obviously loose their job with higher probability even in the pre-crisis period, have
seen a strong deterioration of their employment perspectives: many of them are in
the youngest cohorts. With respect to the family types, it seems that the crisis has
increased the probability of loosing a job for whatever type of family, but less for
couples with children (Table 11.2).
As explained above, many situations of firms’ crisis have been faced with the
CIG institute. For this reason, we present in Table 11.3 data referring to average
CIG usage before and after the crisis.6
From Table 11.3 it emerges that the CIG institute concerns more men, adults
and less educated individuals. The economic crisis has increased the CIG usage for
all groups but those with tertiary education. There are minor differences in CIG
usage between pre and post-crisis periods over the groups, even if the elderly,
females and people leaving in the Center faced a minor increase.
11.2.3 Estimates of Transition Probabilities
In this section we will evaluate if the differences shown above among the groups
are statistically significant and, in doing so, we consider three possible employ-
ment conditions of the individuals: employment, unemployment and out of the
labour force (inactivity).
Table 11.4 presents the transition probabilities that we will estimate later by
mean of a multinomial logit model.
6
We consider individuals working zero hours (‘‘CIG a zero ore’’), individuals working less than
the contractual hours (‘‘CIG a orario ridotto’’) and we include also individuals who did not work
during the previous week because of reduced firm’s activity.
Table 11.2 Employment to 2007–2008 2008–2009 Diff

unemployment yearly
transitions Males 2.5 3.7 1.2
Females 3.1 4.0 0.9
Immigrants 4.7 7.2 2.5
Italian citizens 2.5 3.5 1.0
15–24 6.7 9.7 3.0
25–34 3.7 4.8 1.1
35–44 2.5 3.8 1.3
45–54 1.9 2.8 0.9
55–64 1.5 2.2 0.6
Primary 3.9 5.7 1.7
Lower secondary 3.3 4.8 1.5
Secondary 2.3 3.3 1.0
Tertiary 1.8 2.1 0.3
North–West 2.1 3.3 1.2
North–East 1.6 3.0 1.4
Center 2.7 3.4 0.6
South 4.1 5.1 1.0
Islands 4.6 5.8 1.2
Singles 2.6 3.5 0.9
Couples without children 2.1 3.5 1.3
Couples with children 2.6 3.6 0.9
Single parents with children 3.5 5.4 1.9
Others families or NA 4.4 6.0 1.6
Permanent 1.9 2.7 0.8
Temporary 10.8 15.8 5.0
Self-employed 1.4 1.7 0.3
The table clearly shows that in the post-crisis period the probability of finding a
job if unemployed falls by more than 6% points, whereas the probability of loosing
a job if employed raises by 1.2% points.7
Table 11.5 shows the empirical estimates of the transition probabilities. They
are based on a multinomial logit model, with standard error corrected for the
presence of heteroscedasticity. The initial conditions are being employed, unem-
ployed or inactive one year before.
The probability that the individual i at time t - 1 was in the state S and the same
individual at time t is in the state s, defined as: pi;S;s ; for S, s = [1, 2, 3], is given by:
0
expðbS;s X i Þ
pi;S;s ¼ P3 0
j¼1 expðbS;j X i Þ
where X is a vector of variables including age, gender, citizenship, education, area

of residence, family type, as well as the interaction of these variables with year
2009 (that, by construction is the ‘‘post-crisis period’’).
7
To avoid major inflows into inactivity, we excluded all the individuals aged more than 55.
Table 11.3 Frequency of 2008 2009 Diff

employees in firms under
stress Males 2.0 3.9 1.9
Females 1.8 2.4 0.6
Immigrants 2.1 3.8 1.7
Italian citizens 1.9 3.3 1.4
15–24 1.0 2.8 1.8
25–34 1.4 3.0 1.6
35–44 2.0 3.4 1.3
45–54 2.1 3.6 1.5
55–64 2.8 3.4 0.6
Primary 2.8 4.6 1.8
Lower secondary 2.0 4.2 2.2
Secondary 1.4 2.6 1.2
Tertiary 2.7 2.5 -0.2
North–West 2.0 3.7 1.7
North–East 1.8 3.8 2.0
Center 1.9 2.9 0.9
South 1.9 3.2 1.4
Islands 2.1 2.2 0.1
Singles 2.6 3.5 0.9
Couples without children 2.1 3.5 1.3
Couples with children 2.6 3.6 0.9
Single parents with children 3.5 5.4 1.9
Others families or NA 4.4 6.0 1.6
Parameters for the possible transitions are computed with the maximum like-
lihood method, while relative risk ratios (RRR)8 are shown in Table 11.5.
The risk of being unemployed relative to being employed one year earlier or
loosing their jobs (column 1) is higher for immigrants, it decreases with age and
education and is lower for men and for people from the North as well as for
individuals living in ‘Single parents with children’ family type. When we look at
the changes due to the crisis—measured as the effect of the independent variables
interacted with the dummy for the year 2009—we found that there has only been
an increase in the relative risk for the North–East. With respect to the transitions
from employment to inactivity (column 2), the relative risk decreases with age and
education, is lower for men and higher for people living in the North–East and in
the South and belonging to ‘couples’ family types. For this transition we measured
an increase in the relative risk of males in 2009.
With respect to the transitions from unemployment, we found (column 3) that
middle and old aged faced major problems in finding new jobs as well as women,
8
RRR are equal to the ratio between two different relative risks, both calculated with respect to
the base category for a marginal increase in the independent variable; as an example, the RRR for
the male dummy in the first column of Table 11.5 (base category: employed, category of interest:
PðY i ¼UnempljX¼MaleÞ.
unemployed) should be written as: PðY i ¼EmpljX¼MaleÞ PðY i ¼UnempljX¼FemaleÞ.
PðY i ¼EmpljX¼FemaleÞ
Table 11.4 Transition matrix (self-declared employment condition, percentage)

Year 2008
Employed Unemployed Inactive Total
Year 2007 Employed 95.43 2.40 2.17 100.00
Unemployed 25.96 72.20 1.84 100.00
Inactive 3.21 2.71 94.07 100.00
Total 56.13 8.98 34.89 100.00
Year 2009
Year 2008 Employed 93.97 3.67 2.36 100.00
Unemployed 19.70 78.69 1.61 100.00
Inactive 2.29 2.69 95.02 100.00
Total 53.61 10.83 35.56 100.00
Italian citizens, and individuals with the lowest educational level, coming from the
Center, South and Islands areas, with no particular differences between family
groups. After the crisis, the situation worsened for the middle-aged individu-
als, women and for individuals living in the Northern regions. There are few
significant differences between groups coming from unemployment to inactivity
(column 4). In particular, old aged individuals and the youngest ones (less sig-
nificantly) show higher transition probabilities as well as women and individuals
from couples with children. In the South and the Islands this probability is lower.
The transition probabilities from inactivity to employment (column 5) are
higher for the young and middle-aged individuals, men, more educated individ-
uals, living in the North and are lower for those living in families with children.
The post-crisis period shows a reduction in transitions for men and an increase for
individuals in ‘Single parents with children’ family type. For the transitions from
inactivity to unemployment (column 6), we found a minor relative risk ratio for old
aged individuals and for those living in the North–East, while a higher one was
measured for men, more educated, living in the Islands and in ‘Single parents with
children’ family (even if less significant).
11.3 Transitions and ‘‘Ecological Inference’’
The ‘‘ecological inference’’ analysis (King 1997; King et al. 2004) has been used
in recent years to obtain information on ‘‘group’’ behaviour when only aggregate
behaviour is known.9
9
This methodology has been widely used by political science researchers, particularly in the
analysis of vote flows between parties in different elections.
Table 11.5 Multinomial logit estimates of transition probabilities, relative risk ratios
(1) (2) (3) (4) (5) (6)
E?U E?I U?E U?I I?E I?U
Year 1.19 0.95 0.55** 0.56 0.53 0.84
Ref: age 15–24
Age 25/34 0.59*** 0.45*** 0.98 1.31* 2.21*** 1.07
Age 35/44 0.35*** 0.27*** 0.80*** 1.28 1.79*** 1.02
Age 45/54 0.24*** 0.27*** 0.61*** 1.61*** 0.87 0.38***
2009: Age 25/34 0.92 1.17 1.01 0.74 0.91 1.25*
2009: Age 35/44 1.03 1.18 1.24** 0.90 0.85 1.02
2009: Age 45/54 1.06 1.19 1.21 1.03 1.08 1.35*
Men 0.68*** 0.29*** 1.53*** 0.31*** 1.84*** 1.41***
2009: Men 1.13 1.26** 0.83** 0.94 0.77** 0.87
Migrant 1.51*** 1.19 1.65*** 0.69 0.91 1.17
2009: Migrant 1.13 1.32 0.84 0.72 1.13 0.67**
Ref: primary or less
Junior secondary 0.64*** 0.51*** 1.29** 0.97 1.94*** 1.00
Secondary 0.40*** 0.43*** 1.75*** 1.09 3.49*** 2.12***
Tertiary 0.36*** 0.36*** 1.81*** 0.90 8.90*** 5.75***
2009: Junior secondary 1.07 1.24 0.92 1.20 1.08 1.15
2009: Secondary 1.07 0.86 0.91 1.28 1.22 1.10
2009: Tertiary 0.88 0.84 1.14 1.81 1.16 0.93
Ref: North–West
North–East 0.67*** 1.38*** 1.44*** 1.12 1.19** 0.63***
Center 1.26*** 0.97 0.80** 1.21 0.80** 1.00
South 2.09*** 1.48*** 0.33*** 0.61*** 0.50*** 1.12
Island 2.51*** 1.27 0.34*** 0.42*** 0.45*** 1.46***
2009: North–East 1.35** 0.91 0.77* 0.90 1.05 1.30
2009: Center 0.95 0.92 1.21 0.81 1.05 0.89
2009: South 0.96 0.80 1.56*** 1.16 0.87 0.89
2009: Island 0.89 0.78 1.33** 1.22 0.87 0.78*
Ref: Single
Couples without children 0.87 1.67** 1.04 1.65 0.80 1.16
Couples with children 0.92 1.97*** 1.07 2.13** 0.68** 1.10
Single parents with ch. 1.30** 1.24 0.99 1.25 0.62** 1.54*
Other or N.A: 1.14 1.67** 0.83 1.54 0.89 1.60*
2009: Couples without ch. 1.16 1.28 1.32 2.45* 0.83 1.24
2009: Couples with ch. 0.99 1.08 1.25 1.53 1.45 1.25
2009: Single parents with ch, 0.98 1.11 1.09 1.77 1.85** 1.05
2009: Other or N.A: 1.12 1.32 1.41* 1.67 1.58 1.33
Constant -2.14*** -2.69*** -0.81*** -2.67*** -3.84*** -3.72***
N 93858 93858 17153 17153 45534 45534
r2_p 0.0523 0.0523 0.0574 0.0574 0.0756 0.0756
Wald chi2 2440.97 2440.97 1329.21 1329.21 2621.18 2621.18
* ** ***
10%, 5%, 1%, significant levels; E employed, U unemployed, I inactive
In order to introduce the methodology, consider a traditional problem faced by

ecological inference methods, represented in the following table [from King
(1997), p-14]:
Democrat Republican No vote

Black ? ? ? 221
White ? ? ? 484
130 92 483 705
Suppose that researchers are interested in evaluating the Black and White vote
behaviour, but data are available only for the composition of the population (row
total) and for the total vote obtained (or no vote) by the political parties.
Depending on other data eventually available, scholars have proposed different
methods to estimate the unknown frequencies in the table. For instance, vote data
and population composition could be available at a lower level of aggregation than
the one presented in the above table—say for many districts—King ( 1997) pro-
poses a new methodology to estimate the unknown frequencies when information
on vote behaviour in different ‘‘districts’’ is available, highlighting the importance
of the district dimension (the grouping problem).
In our case, we would like to estimate the transition probabilities among dif-
ferent states, defined by Z = {1; 2; …n}, by using each period marginal
frequencies.10
We exemplify this methodology by assuming that each individual at time t can
be employed, unemployed or out of the labour force, so that Z = {1; 2; 3}. The
observed marginal probabilities, ~ pg;t ; in each group g, and the unobserved tran-
sition probabilities are described
in Table 11.6.

The transition probabilities lzi zj e kzi zj are unknown. Nevertheless, we are
dealing with a transition matrix repeated for different periods, and therefore the
marginal probabilities at time t are dependent on the ones at time t - 1, according
to the relationships presented in Eq. 11.1:
8
1
>
< ~pg;t ¼ ~ p1g;t1 ð1 l12 l13 Þ þ ~ p2g;t1 k21 þ ~p3g;t1 k31
~p2g;t ¼ ~
p1g;t1 l12 þ ~p2g;t1 ð1 k21 l23 Þ þ ~p3g;t1 k32 ð11:1Þ
>
: ~p3 ¼ ~ 1 2 3
g;t p g;t1 l 13 þ ~
p g;t1 l 23 þ ~
pg;t1 ð1 k 31 k 32 Þ
We define sub-groups of the whole population as ‘‘district’’. These sub-groups

are identified by considering individual characteristics as gender, age and so on.
10
We remind that the database ISTAT-RCFL in our hands has the structure of a repeated cross-
section dataset, because the identifier for the same individual across waves is different.
Table 11.6 Three states transition matrix

Period t
1 2 3
Period (t - 1) 1 1 l12 l13 l12 l13 ~p1g;t1
2 k21 1 k21 l23 l23 ~p2g;t1
3 k31 k32 1 k31 k32 ~p3g;t1
p1g;t
~ p2g;t
~ ~p3g;t

For each district the ‘‘true’’ values of lzi zj e kzi zj must be between 0 and 1.
The modal values of the transition probabilities for the whole population are
estimated using a multivariate normal distribution, based, for each district, on
Eq. 11.1. The analysis has therefore been implemented by distinguishing among
the different population groups (the so called ‘‘regionalisation’’).11
With respect to the previous section, a first difference consists in the estimation
of n(n - 1) transition probabilities for each period, instead of individual tran-
sition probabilities. Nevertheless, by modifying the ‘‘regionalisation’’ procedure,
we can estimate the transition probabilities for whatever sub-group of the
population.
The reading of the results of our analysis must consider a precautionary advise:
given that transitions (and permanencies) in a state depend on the number of
individuals that change state inside the group (so that they depend strongly on
‘‘group’’ definition), the interest should concern the dynamics over time of the
different groups more than the absolute value of transitions.12
Among the various analyses that could be done by using the ecological infer-
ence methodology, we propose:
• The overall transition probabilities for five employment conditions (Z = {1; 2;
3; 4; 5}).
• The subgroups transition probabilities which refers to five different type of
households for three employment conditions (Z = {1; 2; 3}).
With respect to the first point, individuals have been grouped in the fol-
lowing employment conditions13: (1) self-employed; (2) permanent employees;
11
For a two-state graphical example of the described methodology, see King (1997). Our
analysis has been carried out using the plugin Ecol on the program Stata.
12
Obviously, the modal value of the change of state inside a given group is inversely related to
the dimension of the groups.
13
The analysis is based both on the ISTAT official definition of employment condition and on
the perceived employment condition.
Fig. 11.2 Estimated probabilities of transition and permanency by employment state

(percentage)
(3) temporary employees; (4) unemployed; and (5) out of the labour force
individuals (inactive).
The ‘‘districts’’ come from the combination of the following individual
characteristics14:
14
In order to consider the sample significance and consistently with the aggregate figures from
ISTAT, data were rounded to thousands.
• Age, five groups: 15–24, 25–34, 35–44, 45–54, 55–64;

• Gender.
• Residence: North–West, North–East, center, south, islands.
To estimate the population in each ‘‘district’’ for each Zi ; we used sample
weights. Results are presented graphically in Fig. 11.2.
The left panels are based on the official employment condition, the right ones
on the perceived status. These two measures usually do not give very different
results, with the exceptions of the permanency in the state of unemployment and
the transition from unemployment toward temporary employment, respectively
strongly higher and lower when measured on the perceived status with respect to
the official one.
The economic crisis, at least from the fourth quarter 2008 to the second quarter
2009, seems to have increased the flows between permanent employment and self-
employment, especially when status is measured by the ISTAT official definition.
Transitions toward unemployment have increased at the end of 2008-beginning
2009 but not later, whereas the probabilities of permanency in unemployment and
in the temporary employment have increased in the late 2009.
In our second approach, in order to quantify the ‘‘vulnerability’’ of households
to the financial crisis, we evaluate the individual transition probabilities consid-
ering the type of family the individual belongs to, among the following type:
• Singles.
• Couples with children.
• Couples without children.
• Single parent with children.
• Other types or not available.15
The dimensions of our ‘‘districts’’ are the same as for Fig. 11.2 (age classes,
gender, regions), but the employment conditions we are interested in here are only
three: employed, unemployed and out of the labour force.16
Figure 11.3 shows, in the two graphs at the top, the results in terms of flows
(from employment to unemployment and vice versa) and, in the two graphs at the
bottom, the permanence probabilities in employment and unemployment. All the
graphs are based on the official ISTAT definition of the employment condition.
Individuals belonging to ‘‘Singles’’ and ‘‘Couples without children’’ family
types show a higher propensity to move from employment to unemployment and
vice versa, and a lower probability to remain in the unemployment trap. These
kinds of households are surely the most ‘‘dynamics’’.
Conversely, individuals belonging to ‘‘Couples with children’’ are the most
‘‘statics’’, because they show a higher propensity to remain in their status: the
15
ISTAT allows the respondent to refuse the identification of the family to which he/she belongs
to. Less than 7% of surveyed individuals choose this option.
16
By doing so, we preserve a sufficient reliable size for the population in each condition for each
group.
Fig. 11.3 Estimated probabilities of transition and permanency in employment condition by type
of households (percentage)
probability of permanency is higher, both in the status of employment and in the

one of unemployment, the probability of transition between states is the lowest.
The economic crisis seems to have:
• Reduced the employment opportunities for individuals in ‘‘Couples without

children’’ and ‘‘Single parent with children’’ family types, because they both
show a reduction in the probability of permanence in the employment condition
and an increase in the probability of loosing a job. Even if an increase in the
probability of leaving unemployment is displayed for them in the top-right panel
of Fig. 11.3, it seems that they have been mostly damaged by the economic
crisis.
• Not worsened the employment opportunities for individuals in ‘‘couples with
children’’ and of ‘‘singles’’.
Therefore, it seems that the households composed by ‘‘Singles’’, and ‘‘Couples
with children’’ suffered less the economic crisis. The former, probably thanks to
their ‘‘dynamic’’ behavior in term of job instability (temporary jobs), had diffi-
culties even before the economic crisis, so that they resulted less vulnerable to the
crisis in our analyses. The latter, probably thanks to the usage of social shock
absorbers as the CIG, that applies to people employed on a permanent basis,
usually old aged.
11.4 Conclusions
Aiming at investigating the effects of the crisis in Italy in terms of individual

transitions mainly between employment and unemployment, we had to face the
unavailability of up-to-date longitudinal micro data on the Italian labour market.
As a consequence we tried to exploit the section of the questionnaire of the
Labour Force Survey on backward employment condition. In this case, we have
been forced to limit the analyses on the perceived employment condition and to
look at yearly transitions.
To relax this constraint, we had to employ a different strategy on the aggregate
data estimated from the survey, in order to recover the flows between employment
and unemployment for the official employment condition. In such a way, we have
been able to estimate quarterly transitions.
The period that we analysed has been characterized by a combination of
increasing redundancies with decreasing job offers. Our results obviously vary as
long as they differ in the definition of the object and in time reference. Notwith-
standing, we confirm the findings about the bad performances for the young and
we find that the different segments of the labour market seem to converge as a
consequence of the crisis.
Men, immigrants and North regions faced the major risks to fall into unem-
ployment, and women, middle-aged and northern individuals had major troubles in
finding a job after the crisis.
With respect to the family types we considered, the most affected individuals
belong to ‘‘Couples without children’’ and to ‘‘Single parent without children’’.
They experienced severe reduction in the employment permanence along with an
increase in the transitions to unemployment.
References
Arpaia A, Curci N (2010) EU labour market behaviour during the great recession, MPRA, Paper
no. 22,393
Berton B, Richiardi M, Sacchi S (2009) Flex-insecurity. Perché̈ in Italia la flessibilità diventa
precarietà. BOLOGNA: Il Mulino
Boysen-Hogrefe J, Groll D (2010) The German labour market miracle. Nat Inst Econ Rev
214(1):38–50 19 Oct 2010
Choudhry MT, Marelli E, Signorelli E (2010) The impact of financial crises on youth
unemployment rate, Quaderni del Dipartimento di Economia, Finanza e Statistica 79/2010,
Università di Perugia, Dipartimento Economia, Finanza e Statistica
Discenza A, Lucarelli C (2009) Dati longitudinali a 12 mesi di distanza–aspetti metodologici,
ISTAT Nota Metodologica allegata alla diffusione dei files MFR, Roma, dicembre
ISTAT (2010a) La mobilitÃ nel mercato del lavoro: principali risultati del periodo 2004–2008,
Approfondimenti, 1 Feb 2010
ISTAT (2010b) Rapporto annuale 2009
King G (1997) A solution to the ecological inference problem: reconstructing individual
behaviour from aggregate data. Princeton University Press, NJ
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Cambridge University Press, Cambridge, MA
Mossfeldt M, Österholm P (2010) The persistent labour-market effects of the financial crisis,
Working paper number 117, published by the National Institute of Economic Research
(NIER), March 2010
Chapter 12
Labour-Market Dynamics
and Unemployment: New Scenarios
in the Italian Economy
Carlo Lucarelli and Chiara Mussida
Abstract The availability of new longitudinal data on the Italian labour market
for the time period 2004–2009 allows us to depict new scenarios for both labour
mobility and unemployment, the latter having increased in relevance since the
beginning of the current economic downturn. To achieve an exhaustive picture of
the Italian labour market we propose investigation in two directions: we provide
both a descriptive analysis and an econometric investigation by estimating
multinomial logit models. We find that as far as our analyses go, possessing some
particular characteristics reduces the negative impact of the economic downturn.
More precisely, individuals with work experience and high educational qualifi-
cations have a higher probability of finding a job. On the other hand, older workers
with temporary contracts (and also with permanent contracts) are more likely to
become unemployed.
Keywords Labour mobility Unemployment Multinomial models

JEL Codes C25 C40 J60 J64
C. Lucarelli (&)
Ufficio Formazione e Lavoro, ISTAT, Rome, Italy
e-mail: calucare@istat.it
C. Mussida
Dipartimento di Scienze Economiche e Sociali,
Università Cattolica del Sacro Cuore, Milan, Italy
e-mail: chiara.mussida@unicatt.it
240 C. Lucarelli and C. Mussida
12.1 Introduction
Analysis of the latest longitudinal data for the Italian labour market is essential for
achieving a complete picture of new scenarios involving the significant economic
phenomena of labour mobility and unemployment. Changes introduced in 2004 in
the definitions and design of the Italian Labour Force Survey (LFS) have resulted
in greater detail and precision, permitting improved in-depth investigations of the
Italian labour market.
Firstly, the increased frequency of the interviews, the survey now being con-
tinuous, makes it possible to obtain a more precise and accurate picture of
dynamics/transitions in the Italian labour market and therefore of the overall
degree of mobility. Secondly, the abandoning of the use of self-perceived criteria
for defining individuals’ economic status ensures more precise and objective
observation of this factor, consistent with the International Labour Organisation
(ILO).
This study aims to analyse labour mobility in the Italian labour market with
special focus on unemployment, which assumes quite relevant proportions in our
country. In particular, the data employed, which refer to the period 2004–2009,
allow us to assess the impacts of the current economic downturn on the labour
market. The improvements in terms of detail and precision resulting from the 2004
renewal of the National Institute of Statistics (ISTAT) LFS, together with the
freshness of the data employed, guarantee that all relevant phenomena are taken
into account, resulting in a thorough and up-to-date description of the Italian
economy.
There is much international literature on labour mobility and unemployment—see
Pissarides and Wadsworth (1989); Bentivogli and Pagano (1999)—and these topics
have also been extensively studied by international institutions (e.g. Comission
2009). We analyse these issues for Italy. To our knowledge, no country-specific study
on labour-market dynamics and unemployment has been carried out recently
for Italy.
Our paper is organised as follows: Sect. 12.2 describes the characteristics and
structural details of the new Italian LFS; Sect. 12.3 illustrates the descriptive
analysis, with Sect. 12.3.1 providing an in-depth analysis of the characteristics of
labour mobility through the period analysed (2004–2009), while Sect. 12.3.2
focuses instead on unemployment, highlighting the characteristics of the
unemployed especially at the height of the economic downturn (2008–2009).
Section 12.4 illustrates the econometric analysis, Sect. 12.4.1 describing the
econometric approach used to estimate the determinants of labour market transi-
tions and Sect. 12.4.2 providing a description of the variables employed in the
econometric analysis, while Sect. 12.4.3 discusses the estimation results and
outlines the new scenarios in the Italian labour market. Section 12.5 concludes.
12 Labour-Market Dynamics and Unemployment 241
12.2 The Continuous LFS
12.2.1 The New Survey
The continuous Italian LFS conducted by ISTAT is the main source of statistical
documentation on the Italian labour market. Its main purpose is to produce official
estimates of the numbers of employed and unemployed people for Italy as a whole
and for its most important administrative subdivisions. These estimates are
employed both for cyclical and structural analysis. The survey has been conducted
each year since 1959 and it has been changed many times. The most recent
changes in the definitions and design of the survey occurred in 2004.1
This renewal, primarily dictated by the requirement to adapt the survey to new
EU standards, was also intended to respond to the need for increased knowledge
and improved survey quality. Each year, the Survey collects information on almost
280,000 households in 1,246 Italian municipalities for a total of 700,000 indi-
viduals (representing 1.2% of the overall Italian population).
The reference sample of the survey consists of all household members officially
resident in Italy, even if temporarily abroad. Families registered as resident in Italy
who habitually live abroad and the permanent members of collective facilities
(hospices, children’s homes, religious institutions, barracks, etc.) are excluded.
The survey unit is that of the family, defined as a group of cohabiting people
connected by marriage, kinship, affinity, adoption, guardianship or affection whose
habitual domicile, but not necessarily their official residence, is in the same
municipality.
The restructuring of the survey has led to changes in the definitions of an
employed person and a person seeking employment. While based on the principles
set out by the International Labour Organisation (ILO), the changes in the clas-
sification criteria of individuals based on occupational status were dictated by the
need to achieve complete harmonization with the requirements of EU regulations
and full comparability with the estimates provided by other countries, such as
those in the OECD area. This makes it possible, all other factors being equal, to
make a comparison with the other EU countries, the U.S. and Japan with respect to
the main labour market indicators such as employment and unemployment rates.
The classification criteria are applied according to a hierarchy: employed
people are identified first, then those classified as non-employed and the
1
The changes introduced in 2004 can be summarised as follows: increased frequency of the
interviews, new criteria for classifying individual economic status consistent with the International
Labour Organisation’s (ILO) definitions, wider-ranging information content, the use of a
professional surveying network involving more than 300 surveyors, the use of computer-assisted
instead of traditional techniques, the implementation of a sophisticated IT system supporting the
carrying out of the survey. For a more detailed discussion of the characteristics of the Italian LFS
(see Gazzelloni 2006; ISTAT 2009).
unemployed seeking employment. Lastly, among those people not classified as

employed or unemployed, the inactive2 are identified.
With regard to employment, the main changes concern the emphasis placed on
objective information on whether a person has worked at least an hour during the
reference week, and the abandoning of self-perception as the main criterion for
distinguishing between the employed and the unemployed. Criteria have also been
established to determine whether an individual is absent from work, the duration of
absence and the wage received during absence.
The main innovation in the identification of people seeking employment is the
introduction of an upper age limit of 74 years. Given this limit, the unemployed
aged 75 years or over are automatically classified as inactive. A three-month time
limit for the possible start-up of a future economic activity has also been included.
12.2.2 Sample Structure and Longitudinal Component
The sampling design of the survey is composed of two stages, with a stratification
of the unit at the first stage; the first stage units are municipalities, while the second
stage comprises households. Each household member is interviewed. The main
difference between the two stages is that while for families a 2-2-2 rotation scheme
is applied, the municipalities surveyed do not change over time. More specifically,
a household was interviewed for two consecutive surveys and, after being
excluded from the sample for two quarters, was interviewed for another two
consecutive quarters. This is defined as a (2-2-2) rotation scheme.3
This rotation system makes it possible to maintain half the sample unchanged in
two consecutive quarters and in quarters one year apart. In other words, the scheme
implies a 50% overlapping of the theoretical sample to a quarter of the distance, a
25% overlapping to three quarters, a 50% to four quarters, and a 25% to five
quarters.
The rules for updating the sample, from which the possibility of reconstructing
the longitudinal component derives, are mainly aimed at obtaining more stable
estimates of the variations at 3 and 12 months’ time-distance (net flows) and to
meet the accuracy constraints set by EUROSTAT, while they are not directly
related to the production of transition matrices (gross flows).
The latter therefore represent a ‘‘by-product’’ of the LFS. Further, the survey is
not a rotating panel in the strict sense and is not referred to the overall population.
It should be noted that an individual interviewed the first time in one of the sample
municipalities is not re-interviewed if, in the period between the first and sub-
sequent interview, he or she has changed residence or moved abroad.
2
For a description of the definitions ‘employed’, ‘unemployed’ and ‘inactive’, see ISTAT
(2010a).
3
For in-depth details on sampling design, see Discenza and Lucarelli (2009).
The longitudinal component, indeed, includes only residents who did not move
beyond the municipality borders in the 12 months following the first interview.
Within a defined time frame, the longitudinal component does not represent the
entire population but only the residents in the same municipality at the beginning
and at the end of the period under consideration. This part of the population is
thereafter called the ‘‘longitudinal population’’.
However, the low level of mobility of the population across the country implies
that only a small part of the overall population is not taken into account (only 2.2%
of the individuals changed municipality of residence in a one-year time period)
and it should be noted that these individuals tend to behave differently on the
labour market with respect to the longitudinal population.
To better understand the structure of the longitudinal data employed in this
work, it is essential to stress their relationship with the cross-sectional estimates
that are issued periodically by the ISTAT. Cross-sectional estimates permit the
determining of possible flows between labour market states/conditions, (typically
by adopting a three-state representation of the labour market, ‘employed’,
‘unemployed’ and ‘inactive’) of the overall population aged 15 and over, i.e. those
individuals involved into the labour market (active population), in a given time
period (quarter or year). The cross-sectional samples of the LFS only permit
estimates of the distribution by labour market state (condition) of the population at
the beginning and end of the period.
As mentioned, part of the initial population may change residence, emigrate or
die. For this part, which is not included in the longitudinal component, the con-
dition at the beginning of the period is known. On the other hand, for the part of
the population which has registered at the register office or reached 15 years of age
during the observed period but is not yet contained in the longitudinal component,
the condition at the end of the period is known. It thus follows that the longitudinal
component based on the LFS data describes only flows of longitudinal population
between the labour market states. These flows are all internal to the transition
matrix.
In the light of these considerations, the longitudinal data can be analysed and
described by employing the following reference scheme:
Figure 12.1 shows a transition matrix (identified as A) which contains the
estimates by labour market condition at the beginning and at the end of the period,
the flows of the longitudinal population, two vectors (C and E) on which the
estimated stocks of the initial and final population by condition are placed, and two
additional vectors required to adjust the longitudinal population with the total
population.
The first vector (B) reports the distribution of deceased people and those can-
celled from register office records according to their condition at the beginning of
the period. The second vector (D) displays the distribution of young people who
reached 15 years of age in the period and people who registered at the register
office classified by their condition at the end of the period.
Within the transition matrix, the rows identify the outflows from the conditions
indicated at the side toward those at the top; the columns identify the inflows into
Fig. 12.1 Matrix scheme: stocks and flows of the overall population
the conditions indicated at the top from the conditions indicated at the side; the
main diagonal identifies the individuals that remain in the same condition at the
beginning and end of the period (permanence in the initial state or condition).
12.3 Descriptive Analysis
12.3.1 Permanence and Labour Market Transitions

for the 2004–2009 period
The longitudinal data employed in this study refer to the first quarter of each year
from 2004 (beginning of the continuous survey) to 2009. Data for the 2004–2008
period have already been released in a final version by the ISTAT (Discenza et al.
2010) whilst for 2008–2009 the estimates are provisional.
In this regard, Fig. 12.2 shows the transition matrix for the last period con-
sidered. After one year, more than 90% of the employed were in the same con-
dition, 2.4% had moved to unemployment, whilst just over 6% had moved to the
stock of inactivity. Permanence in this latter stock is also significantly high,
whereas the group that showed higher dynamics—especially in terms of out-
flows—is that of people seeking employment. For this stock, indeed, the per-
centages of individuals remaining in the initial state and leaving the condition are
more equilibrated.
Fig. 12.2 Labour market transition matrix, longitudinal population qtr1 2008–qtr1 2009.
Thousands (*) Longitudinal population by labour market state at the beginning of the period. (**)
Longitudinal population by labour market state at the end of the period. Transition Probabilities
in italics. Source: Author’s calculations using longitudinal ISTAT 2004/2009 LFS
The use of data for the entire period 2004–2009 highlights the deterioration in
the labour market due to the economic downturn experienced by the Italian
economy.
Table 12.1 displays permanence rates and transitions by labour market condi-
tion (three-state representation) through the overall 5-year period examined (per-
centage values). It should be noted that the last columns of the table refer to the
inactive population aged 15–64. The upper limit of 64 has been selected since the
quota of people aged over 65 represents in almost all cases a condition of per-
manence in inactivity due to retirement, or absence of interest in working or
finding a job. The longitudinal picture faithfully reflects the situation of the labour
market for the period analysed. In the early years, in which employment continued
to grow rapidly, the percentages of permanence in employment were high and the
transition towards unemployment tended to decrease; transitions to the non-labour
force were mainly due to retirement.
Unemployment in this initial period continued to decline and this is reflected,
albeit with fluctuations, by the decrease in permanence in this state (from 32% in
qtr1 2004–qtr1 2005, to 29.3% in qtr1 2006–qtr1 2007). Transitions towards
employment remained at around 30% with a peak in the period qtr1 2007–qtr1
2008, while larger flows are observed from unemployment to inactivity. This is
especially true for the transitions towards the so-called grey inactivity zone.
The grey zone refers to the group of individuals who, despite not showing the
individual characteristics required to enter the stock of unemployment, show a
certain degree of attachment to the labour market. Among these, we find indi-
viduals involved in ‘inactive search’ for work (they are searching, but they have
not carried out any search actions in the last 4 weeks), those seeking employment
but not immediately available to start working within the next 2 weeks, and those
not seeking work but who would be willing to accept a job if it were offered to
them.
In this period we also observe a polarization effect for the outflows from
unemployment to employment, which was expanding, and towards the grey zone,
especially for those willing to work but who do not have professional
246
Table 12.1 Permanence rates and transitions (12 months time-distance) by labour market condition through the period 2004–2009. Percentage values
Condition at time t Employed Unemployed Inactive (15–64 age brackets)
Condition at time t ? 1 Employed Unemployed Inactive Employed Unemployed Inactive Employed Unemployed Inactive
qtr 1 2004–qtr 1 2005 92.0 2.1 5.9 30.1 32.0 37.9 6.4 4.8 88.8
qtr 1 2005–qtr 1 2006 92.6 1.9 5.5 32.1 33.1 34.7 7.6 4.9 87.6
qtr 1 2006–qtr 1 2007 92.4 1.5 6.1 30.2 29.3 40.5 6.9 3.7 89.4
qtr 1 2007–qtr 1 2008 92.6 1.6 5.8 33.5 31.2 35.3 8.3 5.2 86.6
qtr 1 2008–qtr 1 2009* 91.4 2.4 6.2 28.9 32.7 38.4 6.8 4.9 88.3
Author’s calculations using longitudinal ISTAT 2004/2009 LFS
*
Provisional data
C. Lucarelli and C. Mussida
characteristics making them attractive for the labour market; in this respect the
longitudinal data is in line with the results observed for the cross-sectional data.
In the last 2 years the overall situation has changed. In the first quarter of 2008,
after years of continuous decline, the number of unemployed started to rise again
and this translates from a longitudinal perspective into the growth of permanence
in the unemployment state in the period qtr1 2007–qtr1 2008, and into a reduction
of transitions towards inactivity; in contrast transitions towards employment
accelerated, and the total employment stock continued to grow throughout 2008
given that there was also an increase in the inflows (to employment) from the non-
labour force.
At this stage, employment was still unaffected by the economic downturn and
attracted many individuals from the inactive segment. However, given that not all
these inactive individuals were able to find work, there was an increase in the
outflows to unemployment (5.2% in qtr1 2007–qtr1 2008 compared to 3.7% in the
previous year).
Although provisional, the last point of the time series provides the situation of
the labour market at the trough of the economic cycle. Permanence in the state of
employment underwent a slight reduction while transitions toward the other two
conditions rose; the probability of the unemployed finding a job after 12 months
dropped considerably, and this is also the case for the inactive population, whose
permanence rates consequently increased.4
12.3.2 Focus on the Unemployed
Permanence in the state of unemployment increased for both genders, but the
higher growth rate is inferred for men (especially at the trough of the economic
cycle).
More insightful is the trend at local level. This shows that the probability of
remaining unemployed in the north of the country grew significantly over the last
2 years examined; in 2009, the north-east in particular registered an increase of
more than 8% points from 19.7% to over 28%, figures close to the levels for the
north-west and centre of Italy. The area with the highest permanence levels is the
south.
4
It should be borne in mind that this description refers to the dynamics internal to the
longitudinal population which, however, is clearly affected by the latest trends observable from
stock data on the labour market. Conversely, no conclusions can be drawn for individuals not
belonging to the longitudinal population. As previously stated, these groups represent a small
proportion of the overall population and also include a statistically insignificant quota of exits due
to death. It is essential to make this distinction, as exits from the longitudinal population often
conceal relocations to areas offering higher opportunities of finding a job for the unemployed, or
to new jobs offering better conditions for the employed. These phenomena are extremely
important but are beyond the scope of the panel-type analysis proposed in this study.
Fig. 12.3 Inflows into unemployment by contractual form. Source: Author’s calculations using
longitudinal ISTAT 2004/2009 LFS
Fig. 12.4 Outflows from unemployment by contractual form. Source: Author’s calculations
using longitudinal ISTAT 2004/2009 LFS
Approximately half of the workers who found themselves seeking employment

after 12 months had previously held permanent employment contracts. The
number of individuals working as self-employed was lower (and progressively
shrinking), whereas workers under continuing temporary contracts increased,
especially in the final period (Fig. 12.3). The jobless have seen their chances of
finding open-end contract employment or becoming self-employed progressively
reduced in recent years (Fig. 12.4).
This does not mean that the economic downturn has not affected workers
employed on permanent contracts, since the unemployment inflows from
Fig. 12.5 Unemployed: inflows from employment by age bracket. Percentage changes with
respect to the previous period Source: Author’s calculations using longitudinal ISTAT 2004/2009
LFS
permanent employment have increased as well, although to a lesser extent. The

relevance of this impact is clarified by Fig. 12.5, which shows the inflows to
unemployment from employment by age bracket.
In the last period (qtr1 2008–qtr1 2009) the percentage change with respect to
the previous period (12 months before) encompasses increasingly older workers
(40–49 and 50 and over age brackets) who generally hold permanent employment
contracts and who, as mentioned above, are also affected by the economic
downturn. Nor are young workers exempt from the impacts of the downturn;
indeed, young workers are strongly affected by it. A huge number of young people
lose their jobs and move straight into inactivity instead of accessing/entering the
state of unemployment.
At the same time, opportunities for finding fixed-term employment or contin-
uing contract work (often the same thing) have increased.
Figures 12.6 and 12.7 illustrate that almost half of the new unemployment
inflows coming from inactivity belong to the area furthest from the requirements of
the labour market, whilst those making the transition from unemployment to
inactivity enter the so-called grey zone of inactivity.
In the last year, however, the number of those who have moved to the least
attractive area of the labour market have increased. Given the extent of the eco-
nomic downturn, those who in normal circumstances would have become inactive
but would have maintained a degree of attachment to the labour market now prefer
to devote themselves to other activities as they wait for the situation to improve.
The downturn has resulted in more noticeable changes in the prospects of the
unemployed with work experience compared to those seeking employment for the
first time (Fig. 12.8). During the trough of the economic cycle (2008–2009), while
first-time job seekers had the same probability of permanence and transition to
other labour market states as in the previous year, those with work experience had
Fig. 12.6 Inflows into unemployment from grey zone and ‘‘hard’’ inactivity. Source: Author’s
calculations using longitudinal ISTAT 2004/2009 LFS
Fig. 12.7 Outflows from unemployment to grey zone and ‘‘hard’’ inactivity Source: Author’s
much lower prospects of finding employment after 12 months in the period qtr1
2008–qtr1 2009 compared to the previous year (37.2% as opposed 31.3%).
The members of the latter group face an increase in both the permanence rate in
the state of unemployment (of almost 3% points) and in the rate of transition (of
over 3% points) to that state of inactivity known as ‘‘hard’’, i.e. furthest from
meeting the requirements of the labour market. It should be noted that although
first-time job seekers were less likely to find themselves in the same condition after
12 months in the period 2008–2009, this translates into an increase in the number
of the non-labour force rather than into better opportunities of finding a job.
A sizeable component of the inactivity stock is composed of young people
holding an educational qualification. Most likely, this group prefers to pursue
Fig. 12.8 Permanence rates and outflows from unemployment by work experience. Source:
training and studying opportunities instead of immediately facing the increased

difficulties of finding a job characterizing the Italian labour market.5
The probability of finding employment at 12 months’ time-distance is also
strongly related to the duration of unemployment. Normally, those who have been
seeking work for a short period (short-term unemployed) are more likely to find a
job than the long-term unemployed, as the latter often do not have individual
characteristics and skills that are attractive for the labour market, and therefore
face higher permanence in the state of unemployment (prolonged unemployment
duration). This phenomenon is observed during the period qtr1 2007–qtr1 2008
where the likelihood of finding a job for short-term job-seekers is almost double
that for the long-term unemployed (42% with respect to 22%), while the perma-
nence rate is about half (24% for the short-term unemployed compared to 40% for
the long-term unemployed).6
The economic downturn disrupts this scenario (Fig. 12.9). In qtr1 2008–qtr1
2009, job opportunities for the short-term unemployed dropped sharply (-5%
points) and permanence in the state of unemployment increased (+5% points). The
same applies to those who declared they had been searching for employment for
7–12 months; they faced a rising probability of remaining unemployed even after
12 months (over +7% points) and a reduction in their chances of finding a job of
over 11% points.
These changes in unemployment permanence rates exert an impact on job
search duration, short-term duration (less than 12 months) increasing by more than
5% points in the last point of the longitudinal series. However, this is not the result
5
For a detailed analysis of the attainment of educational qualifications, see
ISTAT computations on data from the Ministry of Education, Universities and Research
(MIUR) contained in ISTAT (2010b).
6
From the statistical point of view, the International Labour Organisation (ILO) classifies as
long-term unemployed (LTU) those individuals who have been unemployed for 12 months
or more.
Fig. 12.9 Permanence rates and transitions by unemployment duration. Source: Author’s
Fig. 12.10 Unemployed by transition from short to long-term job search duration, 2007–2009.
Source: Author’s calculations using longitudinal ISTAT 2004/2009 LFS
of re-employment of the long-term unemployed, but rather derives from the sig-
nificant increase in new inflows into the unemployment state.
The spread permanence into unemployment also implies an extension of search
time. Therefore, even if there is a reduced incidence of long-term unemployment
duration (longterm job search), there is an increase in the transitions from short to
long-term unemployment (Fig. 12.10). This is especially the case for men resident
in the centre and north of Italy. This impact of the economic downturn thus results
in an ‘‘unemployment trap’’, from which transition to inactivity is the most fre-
quent exit route.
Individuals in search of a job, indeed, increasingly move to the state of inac-
tivity (from 35.3% in qtr1 2007–qtr1 2008, to 38.4% in qtr1 2008–qtr1 2009). All
these elements lead to discouragement with respect to employment prospects
within the labour supply: in 2009 a discouraged worker effect seems to be
Fig. 12.11 Permanence rates and outflows from unemployment by educational attainment level.
Source: Author’s calculations using longitudinal ISTAT 2004/2009 LFS
predominant and this then leads to an increased inactivity stock. The long-term
unemployed maintained low levels of transition towards employment, although
there was a drop in numbers as more of the long-term unemployed moved to
inactivity, both to the grey zone and to the area furthest from the labour market
(permanent inactivity).
In 2008–2009, therefore, there was a general shift towards a more critical
situation: the unemployed who before the crisis had found few obstacles to finding
a job after a short period of unemployment, experienced more difficulties, while
the long-term unemployed, who were already heavily penalized in the past, turned
away from the labour market in ever larger numbers to swell the various ranks of
inactivity.
A final important observation concerns the educational profile of the unem-
ployed (Fig. 12.11). The worsening economic situation mostly affects the pros-
pects of the unemployed with lower educational qualifications. Compared to the
previous period, in qtr1 2008–qtr1 2009 a greater number of those who had only
completed compulsory education or holding only a school diploma remained
unemployed and had a lower likelihood of finding a job. Further, there is also an
increase in the number of those who move directly to the most extreme condition
of inactivity.
Those holding a degree do not seem subject to this trend. The probability of
them finding a job increased slightly in the last period despite the recession (about
2% points higher than the situation of the previous year) while a decrease of the
same magnitude affected the flow into the grey zone of inactivity.
Holding a degree or other higher educational qualification therefore still helps
access to employment regardless of the economic downturn.7
7
For an in-depth investigation see ISTAT reports on MIUR data (ISTAT 2010b).
12.4 Microeconometric Analysis
The purpose of this section is threefold. First, it describes the econometric model
used to estimate the longitudinal data described in section for the 5-year period
2004–2009. The second part illustrates the variables employed in the analysis and
explains their economic relevance as supported by literature on the labour market.
Finally, emphasis is placed on the estimates obtained for the labour-market tran-
sitions, and we attempt to define where possible and with due caution an inter-
pretative framework of labour mobility for the Italian labour market.
12.4.1 Econometric Model
The literature emphasises that multi-state stochastic models provide a useful fra-
mework for the analysis of data from longitudinal studies when interest lies in the
dynamic aspects of the process under investigation.8 When individuals are con-
tinuously observed over time, transitions between states are observed and para-
metric, nonparametric, and semiparametric methods may be used to investigate
their behaviour (such as in Andersen et al. 1993). In contrast, when the subjects are
seen at discrete time points—such as in panel data exact transition times are not
observed and all that is known is the state occupied at each assessment of the
related survey. Such data are often analysed using Markov Chains models.9 The
features of the data employed in the present work, explained in depth in Sect. 12.4,
allow us to use a Markov Chain approach.
Estimated transition probabilities, such as those described in the previous
section, are averages of heterogeneous individual transition probabilities that are
likely to depend on individual characteristics as well as on the general conditions
of the labour market. Let h ¼ 1. . .n be the indices for the hth individual in the
sample; in this section we deal with the conditional individual transition
probabilities:
pij; t(h) ¼ Pr ¼ ðXt; h ¼ jjXt 1; h ¼ i; zt; hÞ; ð12:1Þ
where Xt,h is the random variable describing the state of individual h at time t,
while zt,h is a vector including individual-level covariates and economic indicators
of the conditions of the labour market (these may not be the same for all indi-
viduals in the sample if, as will be emphasised below, regional-specific indicators
are considered). Since we adopt a three-state representation of the labour market, it
is logical to choose a Multinomial Logit model (MNL). This class of models
8
For a detailed investigation into the application of such models, see Cook et al. (2002).
9
Aeschimann et al. (1999) explain and make use of a Markov chain approach to describe the
evolution of labour market transition probabilities in the Swiss labour market.
extends ordinary logit regression from dichotomous to polychotomous dependent

variables.
We specify a separate model for each row of the transition matrix, i.e. we divide
the sample into three sub-samples, according to their state in the labour market at
the beginning of the reference period. For notational convenience we number the
three states we consider from 0 to 2. The model for the transition probabilities can
be written as follows:
exp zth bl
Pij;h ¼ P2 t
ð12:2Þ
l¼0 exp zh bl
According to Theil normalisation, we set b0 = 0. Conventionally, we will

assume permanence in the initial state as the baseline category. Model parameters
are estimated using Maximum Likelihood. A detailed technical description of the
Maximum Likelihood method in this context can be found in Gourieroux (1989)
and in Cameron and Trivedi (2005). We consider only the transition from the
beginning to the end of the observation period. The data structure, as explained
above, does not make it possible to determine intermediate transitions.
12.4.2 Variables
The analyses carried out in this paper refer to the variables described in the
Appendix Table 12.6. The choice of the variables was driven both by specific
econometric tests and preliminary checks, described in the following section, and
by the relevance of the indicators which are widely emphasized in the literature
and in the aforementioned descriptive statistics.
As mentioned in the last section, we specify a separate model for each row of
the transition matrix, and we estimate each model separately by assuming inde-
pendence of the outflows from each of the three labour market states. The
dependent variables utr, etr and ntr thus refer to the outflows from the states of
unemployed, employed and inactive, respectively. Most of the variables listed in
the descriptive table were estimated for all transitions, with some exceptions.
The first independent variable, ‘man’, attempts to determine the impact of
gender on labour market transitions. The relevance of gender is emphasized both
in past literature, which analyzes aggregate data (e.g. Baussola 1985, 1988; Leoni
1984) and in more recent studies employing individual labour force data (ISTAT,
for the decade 1993–2003), such as Schindler (2009); Trivellato et al. (1989).
In addition, the statistics displayed in Table 12.2 stress the relevance of gender for
the analysis of the current characteristics of the labour market.
The individual age (which in this analysis refers to the working age with the
upper limit of 74 years to reflect the new definition of ‘unemployed’ adopted in the
current LFS) and age squared were both included in all estimates. The previously
quoted studies, together with (among others) Bertola and Garibaldi (2002);
256
Table 12.2 Unemployed: permanence rates by geographical area and gender. Percentage values
Maschi e femmine Maschi Femmine
t1 04 t1 05 t1 06 t1 07 t1 08 t1 04 t1 05 t1 06 t1 07 t1 08 t1 04 t1 05 t1 06 t1 07 t1 08
t1 05 t1 06 t1 07 t1 08 t1 09 t1 05 t1 06 t1 07 t1 08 t1 09 t1 05 t1 06 t1 07 t1 08 t1 09
Italy 32.0 33.1 29.3 31.2 32.7 35.7 33.0 32.4 35.0 37.6 28.9 33.3 26.6 27.6 28.3
North 24.7 27.4 23.2 24.2 28.7 25.3 25.4 27.5 28.5 30.5 24.2 28.7 20.3 20.7 27.3
North–West 24.4 28.7 26.6 27.2 29.0 23.9 25.8 34.1 33.4 29.5 24.8 30.7 20.9 21.4 28.6
North–East 25.2 25.3 18.1 19.7 28.2 28.2 24.9 15.8 19.6 32.5 23.4 25.6 19.5 19.7 25.7
Centre 27.7 35.8 22.3 26.7 29.4 29.1 31.8 26.5 36.2 26.8 26.7 39.1 19.3 20.5 31.3
South 36.2 34.9 34.2 36.3 35.8 40.8 35.7 35.6 37.6 43.2 31.7 34.0 32.7 34.7 27.8
C. Lucarelli and C. Mussida
Picchio (2006), stress the impact of age on transitions in the labour market. Par-
ticular attention was also devoted to the issue of youth unemployment which, as
previously stated, strongly characterises the Italian labour market.10
Other individual characteristics are those of citizenship and household size, the
first to account for the increased weight of foreigners in the labour market,
especially among the employed (ISTAT 2010b), the second so as to include the
relevance of household in assessing probabilities of employment.
The impact of education on labour market transitions is assessed by including
specific dichotomous variables. The importance of educational qualifications is
described in Sect. 12.3.2 of the present analysis and by ISTAT (2010b), both of
which stress that holding a degree reduces the negative impact of the economic
downturn.
The structural variables, which were introduced so as to take into account the
conditions in the labour market, refer to the regional unemployment rates (annual
rates, ISTAT). It is important to emphasize that in addition to capturing the
structural component of unemployment,11 the regional unemployment rate also
summarizes the overall impact of the geographical component.12
This is another peculiarity of the Italian labour market, which is typically
characterized by high geographical differentials and discrepancies, especially in
terms of probability of permanence in and/or transition from the state of unem-
ployment. This issue has also been widely discussed in the literature (among others
Paggiaro 1999; Ricciardi 1991), and it is confirmed by the current analysis, as
outlined in Sect. 12.3.2. The annual growth rate of regional GDP attempts to
summarize the cyclical component.
In relation exclusively to transitions out of the state of unemployment, infor-
mation was included regarding both previous work experience—as this often
increases the likelihood of finding employment (Fabrizi and Mussida 2009; ISTAT
2010b)—and duration of unemployment. The latter is a proxy of duration
dependence, which describes the relationship between the probability of leaving
unemployment and the duration of unemployment itself.
10
The issue of youth unemployment in Italy has been analyzed in the literature by employing
data from different sources. Among these we cite Barbieri and Sestito (2008) who use the ISTAT
LFS, Picchio (2008), who analyzes data from the SHIW, the Survey of Italian Households’
Income and Wealth conducted by the Bank of Italy, and Berton et al. (2008) who use data from
INPS (National Institute of Social Security) administrative archives.
11
By ‘‘structural component of unemployment’’ we mean more permanent (or long-term)
unemployment. For a definition of’structural component of unemployment’, see Jackman and
Roper (1987). The idea of structural unemployment became popular in the 1980s (see, e.g. Sahin
et al. 2010), when economists were trying to understand why unemployment was rising steadily
in many European countries (including Italy).
12
Regional differentiation of the unemployment rate makes it possible to determine the impact
of the geographical component on labour market transitions. The unemployment rate thus absorbs
both geographical and structural components. This indicator in fact precludes the inclusion of
other structural variables.
Table 12.3 Labour market UE UN

transition matrix, outflows
from unemployment, Man 0.293*** -0.567***
2004–2009 Age -0.017 -0.067***
Agesq 0.001 0.001***
Italian 0.058 0.229**
Famsize 0.042** 0.016
Experience 0.381*** -0.278***
Loweduc -0.646*** 0.115
Compulsory -0.672*** 0.133
Diploma -0.472*** 0.123
Urate -0.080*** 0.008
Dursearch -0.001*** -0.001
Gdpgrowth 4.646* 4.503*
Year 2005 0.102 0.057
Year 2006 0.006 0.266***
Year 2007 -0.028 0.069
Year 2008 -0.181* 0.082
Pseudo R2 0.0468
Observations 11,352 11,352
Source: Author’s calculations using longitudinal ISTAT 2004/
2009 LFS
All these variables are described in the Appendix, Table 12.6
Educational attainment title and type of work performed were included only for
the outflows from employment. More precisely, a specific distinction was made
between part-time and full-time work. This variable also makes it possible to
assess the extent to which part-time work (which legislation over the last 15 years
has attempted to encourage, especially for disadvantaged categories of the labour
force, particularly women and the long-term unemployed) has reacted to the
current economic downturn.
The last group of variables consists of five yearly dummy variables which try to
capture the behaviour of our estimates within the time period analysed, in order to
indicate if there is any evidence of trend for the transition probabilities.
12.4.3 Estimates: New Scenarios in the Italian Labour Market
The data described in Sect. 12.2.2 make it possible to determine the current
situation in the Italian labour market and, for the last 2 years examined, i.e.
2008–2009, the impact of the economic downturn on the country. Microecono-
metric analysis also highlights the determinants of the dynamics shown in the
transition matrix given in Fig. 12.2.
Tables 12.3, 12.4, 12.5 display the estimates for the five-year period 2004–2009
from the state of unemployed, i.e.: unemployment to employment (UE) and to
inactivity (UN); employed, i.e.: employment to unemployment (EU) and to
Table 12.4 Labour market EU EN

from employment, Man -0.171*** -0.583***
2004–2009 Age -0.128*** -0.301***
Agesq 0.001*** 0.003***
Italian -0.325 0.128*
Famsize 0.022 0.052***
Loweduc 0.674*** 0.849***
Compulsory 0.329*** 0.383***
Diploma 0.180*** 0.224***
Urate 0.101*** 0.064***
Low_qual 0.791*** 0.521***
Fulltime -0.723*** -0.891***
Gdpgrowth 1.585 -1.983
Year 2005 0.019 -0.079**
Year 2006 -0.221*** 0.122***
Year 2007 0.124* 0.117***
Year 2008 0.379*** 0.101***
Pseudo R2 0.1263
2009 LFS
Table 12.5 Labour market NE NU

from inactivity, 2004–2009 Man 0.905*** 0.626***
Age 0.243*** 0.308***
Agesq -0.003*** -0.004***
Italian -0.022 -0.372***
Famsize -0.003 -0.042***
Loweduc -1.226*** -0.655***
Compulsory -1.112*** -0.440***
Diploma -0.760*** -0.297***
Urate -0.036*** 0.051***
Gdpgrowth -0.925 1.997
Year 2005 0.204*** 0.110**
Year 2006 0.039 -0.211***
Year 2007 0.167*** 0.196***
Year 2008 0.013 0.043
Pseudo R2 0.1769
2009 LFS
inactivity (EN); and inactive, i.e.: to employment (NE) and to unemployment

(NU).
The base category for results interpretation of every MNL is permanence in the
state (UU, EE, and NN).13
Before the pooled estimates reported below were made, we carried out pre-
liminary tests and analyses. Particular attention was devoted to the temporal
dynamics of the transition rates (see also Tables 12.1, 12.2) and an initial esti-
mation exercise was carried out separately for each of the 5 years examined. The
temporal invariance of the impacts of selected explanatory variables for each
multinomial logit model was then verified.
The behaviour of estimated transitions within the time period analysed is
summarized by the yearly time dummies included in each estimate. These esti-
mates, after controlling for individual characteristics by assuming their effects as
constant through time, and taking into account structural features of our labour
market (unemployment rate, absorbing the structural component and GDP growth
rate, representing the cyclical component), try and capture the presence of any
trend in the transition probabilities. Nonetheless, in the present study the temporal
trends are not referred to an excessively prolonged period.
Table 12.3 shows many significant variables for the outflows from unemploy-
ment to employment, and, to a lesser extent, for those from unemployment to
inactivity. The individual characteristics that facilitate successful exit from
unemployment include gender, household size, previous work experience and
holding a degree (or a high educational qualification). A relevant determinant for
both the outflows is the unemployment rate. The latter, as stated above, captures
the structural aspects of the Italian labour market and its geographical component.
Unemployment in Italy, therefore, as stated in the descriptive analysis, is highly
structural in nature. The cyclical component, which in the current analysis refers to
the GDP growth rate, is less relevant.14 Further, employment opportunities are
negatively affected by prolonged unemployment duration. This is also illustrated
in Fig. 12.9.
By looking at the effects of the explanatory variables on the transitions between
unemployment and inactivity, we infer that the latter condition mainly charac-
terizes women without previous work experience. Age also emerges as an
important factor: it appears that the older unemployed have a lower likelihood of
entering the Non-labour force pool.
Transitions out of the state of unemployment do not seem to follow any trend.
Men who are not young and who have high educational qualifications have a
lower likelihood of leaving the state of employment (Table 12.4). Some interesting
13
A similar estimation exercise was conducted for the decade 1993–2003 (Fabrizi and Mussida
2009) on the longitudinal data of the former so-called quarterly survey adopted until 2003 by the
ISTAT.
14
The cyclical and structural impact on labour market of last crisis is beyond the aim of this
paper and need of a longer period after the downturn, due to the usual lagged and persistent
impact of a crisis on labour market.
aspects emerge depending on the type of contract and educational qualification in

the occupation performed. As regards the former, it appears that full-time work
better withstands an economic downturn than part-time; full-time workers face a
lower probability of exiting employment. The same effect is found for occupations
that require high qualifications. This emphasizes the weakness of low-skilled
workers employed under part-time contracts.
Outflows from employment are characterized by a higher number of significant
time-dummy parameters than transitions out of unemployment, especially for
flows towards inactivity. However, the analysis of these coefficients, -especially
those referring to flows between employment and inactivity -reveals an immediate
increase from 2004 to 2005, followed by a level that remains constant over time.
Among the features of interest contained in Table 12.5, it can be observed that
women at the beginning of their working career (individual age effect) are less
likely to exit the state of Non-labour force. This situation is aggravated for indi-
viduals holding low qualifications and by unfavourable labour market conditions
summarized by the unemployment rate.
A high number of relevant parameters emerge for the time trend. This suggests
the existence of fluctuations in transitions in the five-year period considered. Such
fluctuations are also shown in Table 12.1.
We have performed both descriptive and microeconometric analyses in order to

obtain a complete picture of the new scenarios that are emerging with reference to
the labour mobility in Italy, with particular emphasis on the phenomenon of
unemployment.
As regards the latter, the descriptive analysis suggests that conditions deterio-
rate for people in search of employment, especially for long-term job-seekers.
Unemployment increased, affecting an increasingly large component of the male
workforce, and became more widespread in northern areas of the country, espe-
cially at the height of the economic downturn (2008–2009).
Having specific individual characteristics seems to reduce the impact of the
crisis. In particular, previous work experience and holding a degree increase the
chances of successful exit from unemployment. The microeconometric analysis
confirms these findings and further stresses the structural nature of unemployment
in Italy.
The other econometric estimates refer to outflows from the states of employ-
ment and inactivity and make it possible to identify the major determinants, thus
completing the overall picture of mobility in the Italian labour market.
The individual characteristics that increase the chances of remaining in
employment emerge as being male gender, no longer belonging to the ‘young’ age
group and holding a high educational qualification. Interesting aspects emerge
from the type of contract and educational qualification in the occupation
performed. Full-time workers have a lower probability of exiting employment.

The same effect emerges for occupations requiring high qualifications.
Finally, with regard to outflows from inactivity, women appear less likely to
exit the Non-labour force and this points to a strong discouragement effect for
women, especially at the beginning of their working career. Holding low quali-
fications, and unfavourable labour market conditions, inevitably exacerbate the
situation.
The findings of this work suggest that the economic downturn has had a greater
effect on disadvantaged (or weak) labour market categories in terms of both
employment contracts (young people employed under temporary and/or precarious
contracts) and the attitude on the labour market (the unemployed and women
interested in getting a job are affected by a discouragement effect).
The economic downturn implies a change in government labour policy. Past
legislation was intended to increase flexibility at entry level, mainly by introducing
temporary and flexible contracts.
During the period 1997–2008 (before the impact of the crisis was felt),
according to Istat/Eurostat data overall Italian employment figures increased by
3,173 million (largely due to a total increase of 3,076 million workers under
contract; of these 1,180 had temporary contracts and 1,896 million permanent
contracts); in addition, the majority of existing empirical researches into the Italian
context demonstrate that temporary contracts generally favour transition to a
position with a permanent contract (with respect to people/young not passing for
temporary contract).
Recent government action has focused mainly on sustaining individual income
by providing additional funds for the Cassa Integrazione Guadagni (CIG)—the use
of CIG has increased dramatically over recent years and especially at the height of
the economic downturn; and on passive policy such as unemployment benefits.
Such intervention is useful for defending employment levels and human capital
acquired with work experience (useful to firms in the recovery). Only structural
intervention would possibly contribute positively to an exit from this downturn,
and to recovery in employment figures.
Considering other economic policies, it is necessary to reinforce support
instruments at the firm level, such as facilitating bank loans (offering better con-
ditions); indeed, the bank system has not been as efficient and supportive as has
been required by the economic situation. Further, it might be useful to facilitate the
return to work of young people, by offering both flexible employment contract
options and specific fiscal advantages for potential employers.
Appendix
See Table 12.6.

Table 12.6 Description of variables employed in the econometric analysis

Variable Description
Utr 1 for UE, 2 for UN, 3 for UU (base)
Etr 1 for EU, 2 for EN, 3 for EE (base)
Ntr 1 for NE, 2 for NU, 3 for NN (base)
Man 1 if male
Age Age of the individual, [15–74] years age bracket
Agesq Individual age squared
Italian 1 if Italian, 0 if foreigner
Famsize Household size
Experiencea 1 for unemployed with job experience
Loweduc 1 if illiterate or completing 5 years of schooling
Compulsory 1 if compulsory education completed
Diploma 1 for holding diploma
Degree 1 for holding degree or PhD (omitted category)
Urate Regional unemployment rate (annual average)
Dursearcha Search for work duration (months)
Gdpgrowth Annual gdp growth rate, regional level
Low_qualb 1 for blue collar occupation, 0 for white collar
Fulltimeb 1 for full time jobs
Time 2005–time 2008 Time dummies (yearly)
a
Covariates employed only for unemployment related estimates
b
Covariates employed only for employment related estimates
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(AIEL Series in Labour Economics) Giuliana Parodi, Dario Sciulli (Auth.), Giuliana Parodi, Dario Sciulli (Eds.) - Social Exclusi

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(AIEL Series in Labour Economics) Giuliana Parodi, Dario Sciulli (Auth.), Giuliana Parodi, Dario Sciulli (Eds.) - Social Exclusi

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AIEL Series in Labour Economics

For further volumes:

Library of Congress Control Number: 2011936144

Ó Springer-Verlag Berlin Heidelberg 2012

Cover design: eStudio Calamar, Berlin/Figueres

Printed on acid-free paper

Physica-Verlag is a brand of Springer

Antonello Scorcu, Università di Bologna, Italy

1 Introduction and Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Part I The Structural and Long Term Causes of Social Exclusion

2 Health, Lifestyle and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3 A Comparative Analysis of Literacy Rate in Contributing

4 Education and Socioeconomic Mobility in

5 Analysing Industrial Accidents in European Countries

Part II Groups Structurally Vulnerable to Social Exclusion

6 Social Exclusion and Offending . . . . . . . . . . . . . . . . . . . . . . . . . . 105

7 Disability and Social Exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . 127

8 Civilian Disability Pensions as an Antipoverty Policy Instrument?

Part III Economic Crisis, Labour Markets and Social Exclusion

9 Measuring the Long Wave. Unemployment, Discouragement

10 Poverty and Unemployment: The Cases of Italy and Spain . . . . . 199

11 Labour Market Transitions During the Financial

12 Labour-Market Dynamics and Unemployment: New Scenarios

Tindara Addabbo Dipartimento di Economia, Università di Modena e Reggio-

Fabrizio Muratore Scuola Superiore, Università ‘‘G. D’Annunzio’’ di Chieti-

Giuliana Parodi and Dario Sciulli

1.1 The XXV AIEL Conference

G. Parodi (&) D. Sciulli

1.2 Main Approaches to the Discussion of Social Exclusion

exclusion or deprivation score of a person depend on the number of characteristics

interventions and the financial intervention of individual member states. The

1.3 Economic Crisis, Labour Markets and Social Exclusion

Economic conditions are an important factor in determining poverty and social

unemployment dynamics have affected various countries and various worker

1.4 Brief Summary of the Papers in the Book

1.4.1 The Structural and Long-Term Causes

1.4.2 Groups Structurally Vulnerable to Social Exclusion

1.4.3 Effects of the Recent Crisis on the Labour Market

some differences emerge, probably because of some differences in model speci-

and formerly convicted people, are particularly vulnerable to social exclusion.

Keywords Health Lifestyles Growth

2.2 Some Empirical Evidence

These disparities may be explained by differences in Public Health, Medical

First, let us suppose that an economy produces 3 goods: 2 commodities for

2.3.1 The Consumer Utility Function

The consumer utility function is assumed to be a Cobb Douglas function in which

Where a; b and dare the elasticities of h, x and z, respectively.

This is a static model. There is no rational addiction, but positive elasticity

2.3.2 The Health Production Function

hðx; z; h0 ; w; t; eÞ ¼ xq zc h0 we/t ee ð2:5Þ

assumed to exhibit a decreasing return; thus, 0\q\1; 0\c\1; and, therefore,

U ðh; x; zÞ ¼ Xxaq zac xb zd ð2:7Þ

U ðh; x; zÞ ¼ Xxaqþb zdac ð2:8Þ

2.3.3 The Utility Maximization Problem: The Optimal

Let X ¼ 1: The consumer’s budget constraint is px x þ pz z ¼ cy; where px ; pz are

2.4 Comparative Static: The Health Multiplier

d log Y d log Y d log t ð1 aÞ

2.5 A Growth Model with Health

In the comparative static framework, the level of population is constant. In this

In the Neoclassic Economic Growth literature, many models consider health as

Y ðtÞ ¼ K ðtÞa ðAðtÞLðtÞÞ1a ð2:19Þ

Y ðtÞ ¼ K ðtÞa ðAðtÞhðtÞLðtÞÞ1a ð2:20Þ

Equation 2.23 can be rewritten as