Structural reforms for long-term growth

March 18, 2013

Zuzana Šmídová, OECD

What drives economic growth?

2

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

LabourCapitalHuman cap-italMFPGDP per capita

Av

era

ge

% c

ha

ng

e 2

00

0-2

01

1

Note. To ensure that the percentage gap in the components of GDP add up to GDP per capita the decomposition is done in log point differences since the decomposition is multiplicative. GDP per capita is equal to the product of the components MFP, Human capital, (Physical capital/GDP) /(1- )α α and employment/population.

Source: Long-term Growth Scenarios, OECD Economics Department Working Paper No. 1000, forthcoming

Uneven convergence in labour productivity levels over past decade

3

0 5 10 15 20 25 30 35 40 45 50 55 600

2

4

6

8

10

12

14

Chart Title

Level, thousands of US dollars, 2001

Average of growth rates, 2001-11

OECD average

OECD average

Labour productivity is measured as GDP per hour worked for OECD countries and Russia and as GDP per employee for the remaining BRIICS. Source: OECD National Accounts Statistics (Database); OECD (2012), OECD Economic Outlook No. 92: Statistics and Projections (Database); OECD, Employment Outlook (Database).

Difference vis-à-vis upper half of OECD countries GDP pc Labour utilisation Productivity

4India

Indonesia

China

South Africa

Brazil

Mexico

Turkey

Russia

Korea

Spain

Italy

Japan

United Kingdom

France

Germany

Canada

Australia

United States

-100 -80 -60 -40 -20 0 20 40 -100 -80 -60 -40 -20 0 20 40

India

Indonesia

China

South Africa

Brazil

Mexico

Turkey

Russia

Korea

Spain

Italy

Japan

United Kingdom

France

Germany

Canada

Australia

United States

-100 -80 -60 -40 -20 0 20 40

2011 2007Series3

How to improve labour utilisation?

5

6

Long term unemployment a concern since the crisis

Mex

icoIsr

ael

Canad

a

New Z

ealan

d

Sweden

Norway

Austra

lia

Finlan

d

Turke

y

Austri

a

Icelan

d

Denmark

Luxem

bour

g

United

Stat

es

Switzerl

and

OECD

United

King

dom

Netherl

ands

Japa

n

Poland

France

Spain

Czech

Rep

ublic

Belgium

Hunga

ry

German

y

Portug

al

Sloven

ia

Estonia Ita

ly

Greece

Irelan

d

Slovak

Rep

ublic

0

10

20

30

40

50

60

70

80

Share of people unemployed for more than 12 months in total unemployment

2012 Q2 2007 Q4

Per cent

Source: OECD, Quarterly Labour Market Indicators Database.

Improving labour utilisation• Unemployment benefit schemes

• Active labour market policies

• Labour taxation (second income earners, older workers, AETR, METR, …)

• Labour market regulations and collective wage agreements

• Retirement and disability schemes7

Unemployment benefit schemes

8

Net income replacement rates for unemployment1Net income when unemployed as a percentage of net income when working

Unemployment benefit schemes

9

Active labour market policies

10

Public expenditure on active labour market policies per unemployedPercentage of GDP per capita

Retirement and disability schemes

• Official retirement age vs contributory period

• Unemployment of older workers (50+)

• Drawing a pension and/or working• Working – is my pension increasing?,

what tax, ssc do I pay?• How long will I enjoy the pension

(life expectancy, years spent in healthy life)?

11

Men’s pensionable age in OECD

12

1949 1958 1971 1983 1989 1993 1999 2002 2010 2020 2030 2040 2050

Australia 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 66.0 67.0 67.0 AustralieAustria 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 AutricheBelgium 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 BelgiqueCanada 70.0 69.0 68.0 67.0 66.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 CanadaCzech Republic 60.0 60.0 60.0 60.0 60.0 60.0 60.5 61.0 62.2 63.5 65.0 65.0 Rép. tchèqueDenmark 65.0 65.0 67.0 67.0 67.0 67.0 67.0 67.0 65.0 65.0 67.0 67.0 67.0 DanemarkFinland 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 FinlandeFrance 65.0 65.0 65.0 60.0 60.0 60.0 60.0 60.5 61.0 61.0 61.0 61.0 FranceGermany 63.0 63.0 63.0 63.0 63.0 63.0 63.0 63.5 65.0 65.0 65.0 65.0 65.0 AllemagneGreece 55.0 57.0 57.0 57.0 57.0 57.0 57.0 57.0 57.0 60.0 60.0 60.0 60.0 GrèceHungary 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 64.5 65.0 65.0 65.0 HongrieIceland 67.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 IslandeIreland 70.0 70.0 70.0 70.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 IrlandeItaly 60.0 60.0 60.0 55.0 55.0 55.0 55.0 57.0 59.0 61.0 65.0 65.0 65.0 ItalieJapan 60.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 JaponKorea 60.0 60.0 60.0 60.0 60.0 62.0 64.0 65.0 CoréeLuxembourg 65.0 65.0 65.0 65.0 65.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 LuxembourgMexico 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 MexiqueNetherlands 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 Pays-BasNew Zealand 65.0 60.0 60.0 60.0 60.0 60.0 61.1 64.1 65.0 65.0 65.0 65.0 65.0 Nlle-ZélandeNorway 70.0 70.0 70.0 70.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 67.0 NorvègePoland 60.0 60.0 60.0 60.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 PolognePortugal 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 PortugalSlovak Republic 60.0 60.0 60.0 60.0 60.0 60.0 60.0 62.0 62.0 62.0 62.0 62.0 Rép. slovaqueSpain 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 EspagneSweden 67.0 67.0 67.0 67.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 SuèdeSwitzerland 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 SuisseTurkey 60.0 45.0 45.0 45.0 45.0 44.0 44.9 48.6 53.1 57.7 62.3 TurquieUnited Kingdom 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 66.0 67.0 68.0 Royaume-UniUnited States 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 66.0 66.0 67.0 67.0 67.0 Etats-Unis

OECD 64.3 63.9 63.9 63.2 62.8 62.5 62.6 62.7 63.0 63.5 64.1 64.4 64.6 OCDE

Table 1.1. Men’s pensionable age in OECD countries, 1949-2050Tableau 1.1. Âge de la retraite pour les hommes dans les pays de l’OCDE, 1949-2050

Labour taxation – average tax wedge

13

Employment protection legislation

14

Protection of permanent workers against (individual)

dismissal

Regulation on temporary forms of

employment

Specific requirements for

collective dismissal

OECD employment

protection index

Australia 1.37 0.79 2.88 1.38Austria 2.19 2.29 3.25 2.41Belgium 1.94 2.67 4.13 2.61Brazil 1.49 3.96 0.00 2.27Canada 1.17 0.22 2.63 1.02Chile 2.59 2.04 0.00 1.93China 3.31 2.21 3.00 2.80Czech Republic 3.00 1.71 2.13 2.32Denmark 1.53 1.79 3.13 1.91Estonia 2.27 2.17 3.25 2.39Finland 2.38 2.17 2.38 2.29France 2.60 3.75 2.13 3.00Germany 2.85 1.96 3.75 2.63Greece 2.28 3.54 3.25 2.97Hungary 1.82 2.08 2.88 2.11Iceland 2.12 1.54 3.50 2.11India 3.65 2.67 0.00 2.63Indonesia 4.29 2.96 0.00 3.02Ireland 1.67 0.71 2.38 1.39Israel 2.19 1.58 1.88 1.88Italy 1.69 2.54 4.88 2.58Japan 2.05 1.50 1.50 1.73Korea 2.29 2.08 1.88 2.13Luxembourg 2.68 3.92 3.88 3.39Mexico 2.25 4.00 3.75 3.23Netherlands 2.73 1.42 3.00 2.23New Zealand 1.54 1.08 0.38 1.16Norway 2.20 3.00 2.88 2.65Poland 2.01 2.33 3.63 2.41Portugal 3.51 2.54 1.88 2.84Russian Federation2.77 1.04 1.50 1.84Slovak Republic 2.45 1.17 3.75 2.13Slovenia 2.98 2.50 2.88 2.76South Africa 1.91 0.58 1.88 1.35Spain 2.38 3.83 3.13 3.11Sweden 2.72 0.71 3.75 2.06Switzerland 1.19 1.50 3.88 1.77Turkey 2.48 4.88 2.38 3.46United Kingdom 1.17 0.29 2.88 1.09United States 0.56 0.33 2.88 0.85

Scale from 0 (least restrictions) to 6 (most restrictions)Employment protection in OECD and selected non-OECD countries, 2008*

How to improve productivity?

• More competition and business environment– easing restrictions for entry to markets

• Increase human capital – education• Improve general allocation of

resources – cuts in state subsidies, better functioning of financial markets

• Framework conditions – general business environment, tax systems, innovation policies.

15

Product market regulation (PMR)

• Indicators measuring PMR de jure, internationally comparable, with historical data

• state control of business enterprises;• legal and administrative barriers to

entrepreneurship;• barriers to international trade and

investment• World Bank’s Doing Business

country ranking, etc. 16

Education

• Graduation rates (university)• Returns to tertiary education• How to get there – secondary

education, school fees, scholarships• Quality of education

– Success in getting a job ( tertiary)– Success in getting to a uni ( secondary)– Primary? PISA tests (15 yr-olds in

match, reading, science, specific modules)

17

Innovation

18

Business expenditure on R&D is uneven across countries Business enterprise expenditure on R&D as a percentage of GDP1

1. 2010 or last available year. 2007 for Greece and Mexico; 2008 for Chile, Iceland, South Africa and Switzerland; 2009 for Australia, New Zealand and the United States; 2011 for Canada, Germany and Italy.Source: OECD, Main Science and Technology Indicators Database.

19

Structural reforms help sustainability, …

The effects of delying the retirement by five years on fiscal gapsChange in underlying primary balance needed to bring debt to 50% of GDP in 2050

Note: The change is from the underlying primary balance projected for 2012.Source: Merola, R. and D. Sutherland (2012), "Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations", OECD Economics Department Working Papers, No. 934, OECD Publishing.

20

…improve budget balance,

A permanent one-percentage point increase in employment can improve the budget balance by between 0.3 and 0.8 percentage

points

Source: OECD, Economic Outlook 88 Database and OECD calculations.

21

…raise GDP

Difference in the level of GDP in 2050 as compared with baseline scenario for long-term growth

Source: OECD Economic Outlook 91 Long-term Database.

OECD’s Going for growth exercise

22

The pace of reforms has remained high overall

Action on areas covered by GfG recommendations stands at its highest level since

2005

0

0.1

0.2

0.3

0.4

0.5

0.6

Labour utilisation Labour productivity Overall

Responsiveness rate

2005-06 2007-08 2009-10 2011-12 BRIICS

But uneven across countries

24

Particularly high pace of reforms in euro area countries under financial assistance programmes or direct market pressures

Including in politically-sensitive areas: labour market regulations and social welfare systems

Even controlling for these countries, action on priority is highest

Much more moderate pace of reforms in other euro area countries

In particular those with a current account surplus

But also in countries with highest living standards (US, Switzerland, Norway)

More active reforms in these countries would help achieve rebalancing, both globally and in the EA

Countries reforming most have also consolidated their budget

Pace of structural reforms against budgetary consolidation over the past two years

AUSAUT

BEL

CAN

CHE

CZE

DEU

DNK

ESP

EST

FIN

FRA

GBR

GRC

HUN

IRL

ISL

ISRITA

JPNKOR

LUX NLD

NOR

NZL

POL

PRT

SVK

SVNSWE

USA

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

-4 -2 0 2 4 6 8 10 12

Responsiveness rate, 2011-2012

Variation in the underlying primary balance as a percentage of potential GDP from 2010 to 2012

In Europe: Emphasis on active labour market and

social policies

Reforms to foster job creation, hiring and labour mobility, incentives to take-up work

Reduction of barriers to entry in services

In the US:

Active labour market policies

Access to quality education and health insurance 2

6

2013 Going for Growth priorities

In Japan and Korea:

Benefit systems (childcare policies)

Duality in employment protection legislation

In lower-income OECD countries and BRIICS:

Extending the coverage of social protection

Reforming labour market regulation to reduce informality

Improving primary and secondary education

27

2013 Going for Growth priorities

Further reading• Arnold, J., A. Bassanini and S.

Scarpetta (2007), "Solow or Lucas?: Testing Growth Models Using Panel Data from OECD Countries", OECD Economics Department Working Papers, No. 592, OECD Publishing.doi: 10.1787/028487061153

• http://www.oecd.org/eco/growth/going-for-growth-2013.htm

• Employment protection legislation indicators and their impact of employment http://www.oecd.org/employment/emp/oecdindicatorsofemploymentprotection.htm

• Product market regulation and impact on growth http://www.oecd.org/eco/reform/indicatorsofproductmarketregulationpmr.htm

• Measuring quality of education - PISA http://www.oecd.org/pisa/

28