# **_Annex 1 Explanatory variables_**

**<u>Table A1. Explanatory variables used in the analysis – definitions and data sources</u>**

|**_Name_**|<br>**_Abbreviation_**|<br>**_Source_ **<sup>c</sup>|<br>**_Description_**|**_Scale_**|
|---|---|---|---|---|
|Employment protection<br>legislation strictness|_EPL_2_|OECD and Muravyev<br>(2010).|Employment protection legislation index,<br>version 2.|0 to 6, higher =<br>more rigid|
|Government<br>Effectiveness<sup>b</sup>|_GOV_EFFECT_|World Governance<br>Indicators (Kaufmann<br>et al. 2010; World Bank<br>2010)|Captures perceptions of the quality of<br>public services, the quality of the civil<br>service and the degree of its independence<br>from political pressures, the quality of<br>policy formulation and implementation,<br>and the credibility of the government's<br>commitment to suchpolicies.|‐2.5 to 2.5,<br>higher = more<br>efficient|
|Rule of Law<sup>b</sup>|_RULE_LAW_|World Governance<br>Indicators (Kaufmann<br>et al. 2010; World Bank<br>2010)|Captures perceptions of the extent to which<br>agents have confidence in and abide by the<br>rules of society, and in particular the quality<br>of contract enforcement, property rights,<br>the police, and the courts, as well as the<br>likelihood of crime and violence.|‐2.5 to 2.5,<br>higher = better<br>law enforcement|
|Satisfaction with the<br>Government|_SAT_GOV_|European Social Survey<br>(2002-2009), own<br>calculation|Average satisfaction with the national<br>government|0 to 10, higher =<br>more satisfied|
|Government<br>expenditures|_GOV_EXPsq_|Heritage Foundation<br>(2010), own calculation|Government expenditures (consumption<br>and transfers) at all levels as percentage of<br>GDP, squared /100. Recalculated from the<br>Heritage Foundation (2010) Government<br>Spending index: the latter equals<br>100 – 3GOV_EXPsq|0 to 33, higher =<br>higher spending|
|Investment Freedom<sup>b</sup>|_INVEST_FREE_|Heritage Foundation<br>(2010)|Evaluates a variety of restrictions typically<br>imposed on investment (labor market<br>regulations are not included in this index).|0 to 100, higher =<br>less restrictions|
|Trade Freedom|_TRADE_FREE_|Heritage Foundation<br>(2010)|A composite measure of the absence of<br>tariff and non-tariff barriers that affect<br>imports and exports of goods and services|0 to 100, higher =<br>less barriers|
|Business Freedom|_BUS_FREE_|Heritage Foundation<br>(2010)|Measures the ability to start, operate, and<br>close a business|0 to 100, higher =<br>less burdensome<br>regulation|
|Monetary Freedom<sup>a</sup>|_MON_FREE_|Heritage Foundation<br>(2010)|Measures price stability and absence of<br>price controls; negatively related to the<br>square root of exponentially weighted<br>average inflation rate for the most recent<br>three years; in addition, countries with<br>price controls are penalized.|<br> <br> <br> <br> <br>0 to 100, higher =<br>lower inflation<br>and less price<br>controls|
|Tax wedge for low wage<br>earners<sup>a</sup>|_TAX_WEDGE_|Eurostat and IZA<br>database described by<br>Lehmann and<br>Muravyev (2009)|Income tax on gross wage earnings plus the<br>employee’s and the employer’s social<br>security contributions, expressed as a<br>percentage of the total labor costs of the<br>earner, which include gross earnings plus<br>the employer’s social security contributions<br>plus payroll taxes (where applicable).|0 to 100, higher =<br>larger tax burden|
|Implicit tax rate on<br>labor<sup>a</sup>|_TAX_RATE_|Eurostat|Total tax rate on labor computed as the<br>ratio of total tax revenues of the category<br>labor to a proxy of the potential tax base<br>defined using the production and income<br>accounts of the national accounts.|0 to 100, higher =<br>larger tax burden|

_Notes_ :<sup>a</sup> Lagged 1 year in all specifications where used.<sup>b</sup> Lagged 1 year in some specifications. c In few cases, data on the closest available year or interpolation have been used to fill missing data. Relevant related data have been analyzed in these cases to assure validity of the procedure.

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