Inclusive Growth:A framework for linking living standards to policies

Alain de SerresOECD Economics Department

21 May 2014II Europe – Latin America ForumParis

2

IG: F

ram

ewor

k Focus of the presentation

1. Framework for linking outcomes to policies

2. From income generation to income distribution: some evidence on trade-offs and synergies

3. Implications for LAC countries

3

Incl

usiv

e G

row

thObjectives pursued in linking outcomes to

policies

1. Identify the main channels of transmission

2. Make explicit the main policy trade-offs and synergies

3. Approach sufficiently flexible to be adaptable to country-specific challenges and circumstances

4

IG :

Fram

ewor

k Linking policies to outcomes

From production to income to living standards taking into account health outcomes and inequality

Income distribution

Production (income generation)

Living standards

Household Income Life Expectancy

MedianMean Bottom

GDP per capita

5

IG :

Inco

me

gene

ratio

n Income generation:

The policy determinants of GDP per capita

This simple breakdown into labour productivity and employment would be necessary to have the latter dimension explicitly linked to policies

GDP per capita

EmploymentLabour Productivity

Geography

Framework conditions and institutions

Education policies

Human capital

Innovation policies

Knowledge-based capital

Product and financial market policies

Physical capital Life expectancy

Labour market policies

6

IG :

Hea

lth a

nd li

fe e

xpec

tanc

y Health status: the policy determinants of life

expectancy

Missing determinants such as poverty, exclusion, discrimination and job insecurity. Less of a problem if they correlate with income inequality

Health care provisionsPollution

Life Expectancy

Education Life style

Environmental policies

Productionactivites (pro-

growth policies)

Educationalpolicies

Health policies:SpendingEfficiency

Household income

7

IG: F

ram

ewor

k Potential policy trade-offs across dimensions

1. Growth policies and health May raise incomes for a majority but also entail higher air or

water pollution : unclear net effect health and living standards

2. Environmental policies, income and health May lower GDP per capita and household disposable income

but still improve living standards through better health

3. Health policies and income Higher spending on health can raise life expectancy but

could also crowd-out other types of public or private investment (or consumption)

Higher life expectancy may lead to higher employment and GDP but only if working life is adjusted in proportion

8

IG: E

mpi

rical

ana

lysi

s

2. From production to income distribution: Growth policies, employment

and wage dispersion

9

IG :

Inco

me

dist

ributi

on Important to understand how GDP per capita trickles

HH incomes at different point of the distribution

Mean and median incomes have in many countries lagged GDP growth during the pre-crisis period

Real annual growth rates in GDP, mean and median income

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6B. Mid 90s-20071

Median income Mean income GDP per capita

10

IG :

Empi

rical

ana

lysi

s From GDP per capita to HH real disposable income

The responsiveness of HH income to GDP per capita has been weaker at the lower end of the distribution, on average across countries and over the past three decades

Elasticity of bottom to top income standards to GDP per capita

0.5

0.6

0.7

0.8

0.9

1

-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

Bottom to top-sensitive income standards

Average income

Disposable income without time treatment

11

IG :

Sum

mar

y re

sults

The impact of productivity-enhancing policies on earnings inequality and employment

G = Good; B = Bad; N = Neutral

Wage dispersion Employment

Overall earnings

dispersion A pro-growth change in: D9/D1 D9/D5 D5/D1

Technology

Technical progress (MFP) B + N B

Trend R&D intensity B + N B

Globalisation

Trade integration N - N N

FDI openness (index) N - N N

Education / Human capital

High-to-low skill ratio G - - G G

Product market competition

Regulatory barriers to entry B + N / G N / G

12

IG :

Sum

mar

y re

sults

The impact of labour market policies on earnings inequality and employment

G = Good; B = Bad; N = Neutral

Wage dispersion Employment

Overall earnings

dispersion A change in: D9/D1 D9/D5 D5/D1

Labour Market Policies

Easing EPL (overall protection) B + N / G B / N

Easing EPL (reducing duality) G G G

(Lower) minimum wage B + N / G N

Lower UI benefit RR B G N

Higher ALMPs N G G

Lower tax wedges B + G N / G

Labour force composition

Participation of women G - G G

13

IG: E

mpi

rical

ana

lysi

s

3. What this suggests for LAC countries

14

IG :

Perf

orm

ance

Convergence in productivity levels has been uneven over the last decade

Performance of LAC countries has been disappointing considering the scope for catching-up

Average productivity growth over 2002-12 against level in 2002

AUSCAN

DNK FRADEU

HUN

ITA

JPN

KOR

MEX

POL SVK

ESP

TUR

GBR

USA

RUS

BRA

CHN

IND

IDN

ZAF

COL

EU

CHL

0

1

2

3

4

5

6

7

8

9

10

11

0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 42.5 45 47.5 50

Level, US dollars, 2002

Average of growth rates, 2002-12

OECD average

OECD average

Average of growth rates, 2002-12

OECD average

OECD average

15

IG: P

erfo

rman

ce Substantial gaps prevail in average levels of education

but EMEs have been catching up over the past 20 years

EMEs also lags in terms of educational outcomes based on PISA scores

Average number of years of schooling of the adult population

0

2

4

6

8

10

12

14

16

IND IDN CHN TUR BRA SAU MEX ZAF KOR ESP ITA RUS ARG FRA CAN JPN GBR AUS DEU USA

2010 1990 1970

16

Goi

ng fo

r Gro

wth

: Pe

rfor

man

ceGreat scope for IG from quality and equity in education

Peru

Costa RicaChile

Bulgaria

Portugal

France

Uruguay

Chinese Taipei

Romania

Israel

Germany

Indonesia

Colombia

Tunisia

ArgentinaBrazil

Malaysia

TurkeyGreece Russian Federation

SpainUnited Kingdom

Viet NamBelgium

Switzerland

Singapore

Shanghai-China

United States

Hong Kong-China

Finland

Japan

Sweden

AustraliaCanada

Macao-China

Kazakhstan

Qatar

Norway

Mexico

Korea

Italy

300

350

400

450

500

550

600

650

051015202530

Percentage of variation in performance explained by the PISA index of economic, social

and cultural status

OE

CD

av

era

ge

OECD average

Above-average mathematics performanceBelow-average equity in education outcomes

Above-average mathematics performanceAbove-average equity in education outcomes

Below-average mathematics performanceBelow-average equity in education outcomes

Below-average mathematics performanceAbove-average equity in education outcomes

Greater equity

17

IG :

Polic

ies

Regulatory barriers to competition are relatively high

Gap vis-à-vis OECD average is particularly large in barriers to foreign competition

OECD Indicator of Product Market Regulation, 2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Product marketregulation

State control Barriers toentrepreneurship

Barriers to trade andinvestment

OECD average LAC average

18

IG :

Polic

ies

But with substantial variation across LAC countries

Preliminary results based on collaboration with the World Bank

OECD Indicator of Product Market Regulation, 2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

CHL COL PER SLV NIC MEX DOM JAM BRA CRI HND ARG

OECD average

LAC average

19

IG :

Polic

ies

Low female participation limits labour force participation in some countries

Particularly low relative to total participation in Mexico, Turkey but also low in Chile.

Labour force participation rates, 2011

0

10

20

30

40

50

60

70

80

90Per cent

Women Total

20

IG :

Polic

ies

Reforming labour regulation and extending social protection can help reduce informality

Protection of workers against individual dismissals, 2013

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5Scale 0-6

Difficulty of dismissal Notice and severance pay for no-fault individual dismissal Procedural inconvenience

OECD average: 2.04

21

IG :

Polic

ies

A minimum wage can be a powerful tool to reduce earnings inequality but less so for formal sector job creation

Minimum cost of labour is already high in Brazil and Chile

Ratio of minimum to median wages, 2011

0

10

20

30

40

50

60

70

80

RUS

IND

CHN

CZE

USA

JPN

EST

KOR

LUX

ESP

POL

CAN

SVK

GBR NL

D IRL

HUN

BEL

GRC AU

S

ISR

PRT

SVN

NZL

FRA

IDN

CHL

BRA

TUR

22

IG: F

ram

ewor

k Conclusion / Way forward

Substantial progress achieved in LAC countries in social convergence and poverty reduction

Challenge ahead: Generating sustained growth while creating a large middle class. Tackling informality

Encouraging labour force participation of women

Building sufficient institutional capacity to design and administer more sophisticated programmes

Challenge of IG framework: Ensure that it is sufficiently flexible to reflect these objectives

Adding (short-term) educational outcomes to the welfare function to give it higher priority

The jobs dimension should reflect the informality priority

23

IG: F

ram

ewor

k

Thank you

24

IG :

Empi

rical

ana

lysi

s From GDP per capita to HH real disposable income

The treatment of time shifts the average elasticity closer to one, in particular around the median. But top income severely underestimated in survey data.

Elasticity of bottom to top income standards to GDP per capita

0.5

0.6

0.7

0.8

0.9

1

-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

Bottom to top-sensitive income standards

Average income

Disposable income without time treatment

Disposable income with time dummies

25

IG :

Empi

rical

ana

lysi

s Growing inequalities can be harmful to GDP per capita

Growing inequality has an invariably negative impact on GDP per capita in the long term.

GDP elasticity to inequality across the distribution

-2

-1.75

-1.5

-1.25

-1

-0.75

-0.5

-0.25

0

-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

Bottom to top-sensitive Atkinson measures