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Economic Policy Reforms

Going for Growth

INTERIM REPORT

2016

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Economic Policy Reforms

2016

GOING FOR GROWTH

INTERIM REPORT

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This work is published under the responsibility of the Secretary-General of the OECD. The

opinions expressed and arguments employed herein do not necessarily reflect the official

views of OECD member countries.

This document and any map included herein are without prejudice to the status of or

sovereignty over any territory, to the delimitation of international frontiers and boundaries

and to the name of any territory, city or area.

Please cite this publication as:

OECD (2016),

Economic Policy Reforms 2016: Going for Growth Interim Report,

OECD Publishing, Paris.

http://dx.doi.org/10.1787/growth-2016-en

ISBN 978-92-64-25007-9 (print)

ISBN 978-92-64-25008-6 (PDF)

ISBN 978-92-64-25130-4 (epub)

Series: Economic Policy Reforms

ISSN 1813-2715 (print)

ISSN 1813-2723 (online)

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of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli

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Going for Growth

was launched in 2005 as a new form of structural surveillance

complementing the OECD’s long-standing country and sector-specific surveys. In line with

the OECD’s 1960 founding Convention, the aim is to help promote vigorous sustainable

economic growth and improve the well-being of OECD citizens.

This surveillance is based on a systematic and in-depth analysis of structural policies and

their outcomes across OECD members, relying on a set of internationally comparable and

regularly updated policy indicators with a well-established link to performance. Using these

indicators, alongside the expertise of OECD committees and staff, policy priorities and

recommendations are derived for each member and, since the 2011 issue, six key

non-member economies with which the OECD works closely (Brazil, China, India, Indonesia,

Russian Federation and South Africa). From one issue to the next,

Going for Growth

follows

up on these recommendations and priorities evolve, not least as a result of governments

taking action on the identified policy priorities.

Underpinning this type of benchmarking is the observation that drawing lessons from

mutual success and failure is a powerful avenue for progress. While allowance should be

made for genuine differences in social preferences across OECD members, the uniqueness of

national circumstances should not serve to justify inefficient policies.

In gauging performance, the focus is on GDP per capita, productivity and employment. As

highlighted in the past and again in this issue, this leaves out some important dimensions

of well-being. For this reason,

Going for Growth

regularly features thematic chapters

dedicated to these other dimensions, and increasingly looks at the side effects of

growth-enhancing priorities on other government policy objectives.

Going for Growth

is the fruit of a joint effort across a large number of OECD Departments.

www.oecd.org/economics/goingforgrowth

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EDITORIAL RESTORING HEALTHY GROWTH: POLICIES FOR HIGHER AND MORE INCLUSIVE PRODUCTIVITY

Editorial

Restoring healthy growth: policies for higher

and more inclusive productivity

pickup in global growth remains elusive, almost eight years after the financial crisis

erupted. The recovery in advanced economies is still muted, particularly in the euro area

and Japan, while growth has slowed in emerging-market economies (EMEs). Trade and

investment remain weak, while jobs and wage growth have been disappointing. Financial

markets are increasingly volatile as capital searches for both yield and safety. Getting back

to healthy and inclusive growth calls for urgent policy response, drawing on monetary,

fiscal, and structural policies working

together:

On the one hand, demand policies alone will

not restore sustainable growth; but on the other hand, policies to strengthen competition

and innovation, spur job creation, and repair financial systems to fund investment will

only yield results if there is enough demand.

This 2016

Going for Growth

report underscores the importance of synergies among

policies in designing policy packages. Policy coherence across a broad range of reform

objectives such as product market competition, labour mobility and financial market

robustness is critical to create an environment conducive to innovation and resource

reallocation, which are crucial to reverse the widespread slowdown in productivity and the

rise in inequality.

Productivity – a central ingredient in the pursuit of wellbeing – has been decelerating

in a vast majority of countries, with the slowdown going back to around 2000, at least in

advanced economies. While this may partly reflect measurement issues, a common set of

unsettling trends lie behind the aggregate slowdown: the dispersion of productivity growth

across firms within industries, the decline in the growth rate of investment in knowledge-

based capital, and the reduction in the pace of business creation. These trends are

outcomes from problems in the basic policy environment – market competition and

innovation, labour market institutions, financial structure and robustness – which also

contribute to unfavourable trends in income distribution.

In addressing the productivity and inclusiveness challenges, governments need to

keep in mind the basic policies that underpin these developments, and hence the need for

coherent policy packages. Start with narrowing the productivity gap across firms, which

requires a better diffusion of innovations from leading to lagging firms. Since leading firms

are mostly multinationals, the intensity of cross-border connections via trade, FDI, global

value chains and the mobility of skilled labour is crucial for the diffusion of knowledge and

technologies from these globalised “frontier” firms to national firms.

Giving international trade a fresh boost requires that recent multilateral agreements in

this area be forcefully implemented but also that efforts be made to further reduce barriers

in the form foreign ownership restrictions or preferential treatments of domestic suppliers

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EDITORIAL RESTORING HEALTHY GROWTH: POLICIES FOR HIGHER AND MORE INCLUSIVE PRODUCTIVITY

with respect to public procurement, taxes and subsidies. In several EMEs – notably Brazil,

India and Indonesia – barriers to infrastructure investment need to be addressed to

significantly improve the transport and logistic services that underpin cross-border trade.

Next, consider improving knowledge diffusion and making the most of new

technologies, which necessitates synergic investments by lagging firms in various forms of

knowledge-based capital such as R&D, skills and organisational know-how. Despite the

need to revive investment in knowledge-based capital, the incidence of innovation policy

reforms appears to have steadily fallen in recent years, as documented in this report.

Furthermore, for reforms in the area of innovation to pay off, firms need the right

incentives to strive for the development of new and better-quality products at lower costs.

Strong product market competition provides such incentive. In this regard, the decline in

business start-ups in advanced economies could be a sign that barriers to entry, including

through the financial system, have been creeping up and hence that the strength of

competition is eroding.

Re-examination is needed of competition policy, bankruptcy legislation and product

market regulations to facilitate entry and exit, and to provide a level playing field between

new firms and incumbents. As emphasised in this report, pro-competition reforms are

particularly needed in services where the scope for both job creation

and

productivity gains

remains large. This is especially true for Germany, Japan and Korea where the gap in

productivity between services and manufacturing is the largest among advanced

economies, but also for China as the economy goes through a challenging rebalancing from

manufacturing to services.

Deeper global integration and the growing reliance on intangible forms of capital

stresses the importance of collective policy approaches in the areas of competition law

enforcement, regulatory harmonisation, basic research and the taxation of mobile capital.

One major achievement in 2015 has been the global agreement on a list of measures to

limit tax avoidance by multinationals through the so-called Base Erosion and Profit

Shifting (BEPS) action plan elaborated under the auspices of the G20 and the OECD.

In addition to fostering competition, product market reforms also facilitate the

reallocation of resources from low- to high-productivity firms. The efficiency of resource

allocation would be further enhanced with measures to reduce barriers to labour mobility,

notably those linked to housing markets. In turn, to ensure that resource reallocation truly

serves wellbeing, workers need to be better equipped and offered real opportunities to

adapt skills. Adult learning programmes should thus focus more strongly on skills

complementarity with technological progress so as to help to reduce skills mismatch and

to facilitate adaptation to the rapid change in the nature of tasks associated with specific

jobs. Improving the matching of skills to jobs raises productivity and reduces inequality.

Sustained growth and job creation are the best ways to improve income distribution,

since the low- income and less-skilled bear the brunt of economic downturns. A challenge

for several advanced economies – in particular those facing persistently high unemployment

such as France, Italy and Spain – is to shift social protection from specific jobs to individuals

so as to better support the process of jobs and firms turnover that underpins dynamic,

growing economies. Reforms in this area will help to improve job opportunities for youth and

low-skilled workers, particularly hard hit by unemployment. For emerging economies,

stronger social protection is needed to reduce informality and inequality, while fostering

domestic consumption.

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EDITORIAL RESTORING HEALTHY GROWTH: POLICIES FOR HIGHER AND MORE INCLUSIVE PRODUCTIVITY

Strong employment growth is critical to ensure that growth benefits all segments of

society, but it is not sufficient. In several countries, a large and rising share of the growth

benefits have accrued to high-income households, while income at the bottom has been

stagnant for many years. In the United Kingdom and in particular the United States, reforms

to provide better access to high-quality education for students from disadvantaged

backgrounds combined with measures to make the tax system more efficient and equitable

would help to make growth more inclusive. In some countries such as Italy and Korea,

household income has not kept up with GDP gains over the past two decades. Chapter 3 of

this report explores the channels through which the income generated through GDP is

transmitted to households.

Given the breadth and evolving nature of the growth and inclusiveness challenges

facing advanced and emerging economies, the slowdown in the pace of structural reform

documented in this report is deeply concerning. While the pace of reform should be

accelerating to restore sustainable and equitable growth, the pace of reforms appears to

have steadily declined since 2011-12. While some countries have made considerable

efforts, many have taken very little action and countries with ambitious reform

programmes, such as in India, Japan and Turkey face significant political challenges and

the risk of losing momentum. Progress has been made on the G20 action plan to raise

reform efforts, but much remains to be fully implemented.

Given the weak demand environment, structural reform packages that promote

productivity should focus as well in design on maximising short-run growth gains. Chapter

2 of this report reviews the issues and evidence on the impact of reforms introduced in a

difficult economic conjuncture for their outcomes in terms of both productivity and

income distribution. Reform strategies that put more weight on shifting the composition of

public spending towards investment, facilitating the entry of new firms in services, and

reducing barriers to labour mobility are most likely to boost activity in the short term, with

the support of demand policies and a repaired financial sector. More vigorous reform

efforts from euro area countries with a large current account surplus would also help to

ensure that the current growth pick-up in that region does not succumb to internal

divisions and external headwinds. All countries contributing collectively to reform efforts

and to supportive demand improves the prospects for a return to higher productivity and

more inclusive growth both at home and in the global economy.

Catherine L. Mann

OECD Chief Economist

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TABLE OF CONTENTS

Table of contents

Executive summary

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 1.

Overview of structural reforms in the policy areas identified

as priorities for growth

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Overview of structural reforms in the policy areas identified

as priorities for growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A global overview of the progress on reform priorities . . . . . . . . . . . . . . . . . . . . . . . .

Assessment of reform progress by country groups . . . . . . . . . . . . . . . . . . . . . . . . . . .

The implications of growth-enhancing structural reforms for inclusive growth

and macroeconomic rebalancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2.

Reform priorities in a difficult macro context.

. . . . . . . . . . . . . . . . . . . . . . . . .

Reform priorities in a difficult macro context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Structural reforms in normal times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Structural reforms under weak demand conditions . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Structural reforms under weak demand and constrained macroeconomic policies 73

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix 2.1.

Detailed analysis on the impact of reforms in normal times . . . . . . .

Chapter 3.

From GDP to average household income: A look at the transmission

channels.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

From GDP to average household income: A look at the transmission channels . . . 88

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Adjusted Household Disposable Income: definition and cross-country patterns . . . 90

Tracking income growth from the household perspective and explaining

the gap

vis-à-vis

GDP growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Income distribution between the household and non-household sectors . . . . . . . 99

From functional income distribution to income inequality . . . . . . . . . . . . . . . . . . . . 107

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Appendix 3.1.

Policy drivers of the labour share: a brief literature overview. . . . . . . 116

Chapter 4.

Structural policy indicators

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

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Economic Policy Reforms 2016

Going for Growth Interim Report

Executive summary

lobal growth prospects remain clouded in the near term, with emerging-market

economies losing steam, world trade slowing down and the recovery in advanced

economies being dragged down by persistently weak investment. These near-term

concerns arise against the background of a widespread deceleration of productivity gains,

with the downward trend going back to early 2000s – at least in advanced economies – and

with little signs of revival. The growth slowdown observed among emerging-market

economies over the past couple of years also raises questions about their capacity to

further closing the income gap vis-à-vis most advanced countries. The case for structural

reforms, combined with supporting demand policies, remains strong to sustainably lift

productivity and the job creation that will promote improvements in equity.

Going for Growth

offers a comprehensive assessment to help governments reflect on how

policy reforms might affect their citizens’ wellbeing and to design policy packages that best

meet their objectives. The

Going for Growth

framework is instrumental in helping G20

countries to monitor their efforts to fulfil the pledge made in 2014 of boosting their combined

gross domestic product (GDP) by 2%, and to adapt their growth strategies accordingly.

This interim report reviews the main growth challenges faced by OECD and selected

non-OECD countries and takes stock of progress over the past year or so in adopting

structural policy reforms to address them (Chapter 1). This is examined in light of the

thrust of the country-specific priorities identified in the 2015 issue of

Going for Growth.

The

potential implications of growth-enhancing reforms for inclusiveness and macroeconomic

rebalancing are also discussed, with a focus on public finance consolidation, the narrowing

of current account imbalances, and the reduction of income inequality.

The report also reviews the issues and evidence on the impact of reforms implemented

in a context of persistently weak demand as well as under different cases regarding the

availability or effectiveness of macroeconomic policies in supporting the reforms

(Chapter 2). Finally, the report provides an assessment of the link between income generated

from GDP and income distributed to households (Chapter 3). In particular, it examines how

the main channels through which GDP growth is transmitted to the household sector have

evolved over the past two decades across OECD countries.

Policy reform challenges

●

In devising reform strategies to sustainably improve the wellbeing of a majority of

citizens, governments around the world need to address deep structural weaknesses

that the crisis laid bare, but which in many cases originated well before.

The global slowdown in productivity growth has been characterised by the widening of

the dispersion of productivity growth across firms within industries, in particular

●

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EXECUTIVE SUMMARY

between frontier firms – essentially multinational enterprises which have maintained

steady productivity growth – and all other firms that operate well within the productivity

frontier. Removing barriers that stifle entrepreneurship and limit the capacity of firms to

make the most of knowledge and technological diffusion is a reform priority.

●

Reducing unemployment continues to be a major challenge for many countries, particularly

so in Southern and Central European countries where long-term unemployment remains

particularly high. Other countries have been facing relatively high rates of labour market

withdrawals (e.g. United States), low labour force participation of women (Korea and Japan)

or a high incidence of informal employment (most emerging-market economies).

Addressing these labour market challenges is a priority to make growth more inclusive.

Progress achieved in 2015

●

Even though progress is made in tackling some of the main challenges, the slowdown in

the pace of reforms observed in 2013-14 has continued in 2015, even after taking into

account measures that are in the pipeline but that have yet to be fully implemented.

The pace of reforms has varied both across countries and policy areas.

❖

It continues to be generally higher in Southern European countries (in particular Italy

and Spain) than among Northern European countries. Outside Europe, countries where

a relatively high number of measures related to

Going for Growth

recommendations have

been taken include Japan among advanced economies, and China, India and Mexico in

the case of emerging economies.

❖

Relatively more actions have been taken to lift the labour force participation of women

and to improve educational outcomes, while fewer actions are observed in the areas of

innovation policy, public sector efficiency or product and labour market regulation.

●

In countries where income inequality is a particular concern, the majority of actions

taken on policy priorities are likely to help narrowing the income distribution. However,

recent actions taken to boost growth are unlikely to help countries with largest current

account deficits to narrow their external imbalances.

Reforming in a context of weak demand

●

Against the background of subdued global economic prospects, there is a good case for

prioritising reforms that in addition to stimulate employment and productivity, can best

support activity in the short term.

❖

Aside from raising investment in public infrastructure, these include reductions of

barriers to entry in services sectors with pent-up demand, reforms of benefit

entitlements in the areas of health and pension, as well as reforms of housing policies

and job-search assistance programmes to facilitate geographic and job mobility.

❖

Increasing the short-term payoff from structural reforms also requires that remaining

financial sector dysfunctions be addressed so as to improve the flow of credit to

households and firms with limited access to financial markets.

❖

In the euro area, a greater synchronisation of reforms would also help reduce the

transition costs by giving greater scope to monetary policy to mitigate the potential

rise in real interest rates resulting from persistently low inflation.

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EXECUTIVE SUMMARY

❖

Countries with very limited budgetary room may have to prioritise on high short-term

returns or on low-cost measures and ensure that others are financed through means

that are as friendly as possible to employment and growth.

GDP growth and aggregate household income

●

Real GDP has tended to grow by more than real household income in the majority of

OECD countries between the mid-1990s and 2013.

This growth gap is partly due to factors having little policy traction, in particular the fact

that consumption prices (which include VAT) have tended to rise relative to production

prices over the period under consideration, the only exceptions being commodity

exporters such as Norway, Australia and Canada.

The household income share of GDP, simply defined as the ratio of nominal household

disposable income over nominal GDP, has been stable over the period under

consideration and on average across OECD countries. This average stability masks

heterogeneity in both the level and evolution across countries, with a large decline

observed in Austria and Korea and a large increase in the Slovak Republic and Finland.

Developments in the household income share of GDP can be assessed by looking at the

profile of households’ labour, capital and secondary ( i.e. net government transfers)

income share of GDP. A large number of countries have experienced a concomitant

decline in the labour share of GDP and in the share of capital income going to

households, suggesting that a rising share of profits has been retained by the corporate

sector instead of being redistributed to the household sector.

Yet, there are no clear links between the changes in income distribution between the

household, corporate and government sectors of the economy on the one hand, and the

rise in income inequality within the household sector experienced by many OECD

countries, on the other.

●

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Economic Policy Reforms 2016

Going for Growth Interim Report

Chapter 1

Overview of structural reforms

in the policy areas identified

as priorities for growth

This chapter reviews the main growth challenges faced by OECD and selected non-

OECD countries and takes stock of the progress made since 2015 in the adoption

and implementation of structural policy reforms to address these challenges.

Progress is assessed on the basis of actions taken in response to Going for Growth

policy recommendations. The chapter also discusses the potential effect of the

reforms on policy objectives other than GDP growth, in particular public finance

consolidation, narrowing current account imbalances and reducing income

inequality.

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authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights,

East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Overview of structural reforms in the policy areas identified as priorities

for growth

Main findings

●

The slowdown in the pace of reforms observed in 2013-14 has continued in 2015, even

after taking into account measures that are in the pipeline but that have yet to be fully

implemented.

❖

On average across advanced economies, about 14% of the reform recommendations

found in

Going for Growth

have been fully implemented in 2015, while another 36% are

in the process of implementation.

❖

For emerging economies, fewer recommendations have been fully implemented

in 2015 but initial steps have been made on around 44% of recommendations.

❖

The share of implemented recommendations has generally been higher in Southern

European countries (in particular Italy and Spain) than in Northern European

countries.

❖

Outside Europe, countries where a relatively high number of measures related to

Going

for Growth

recommendations have been taken include Japan among advanced

economies and China, India and Mexico in the case of emerging economies.

●

The intensity of reforms has also varied across policy areas. Relatively more actions have

been taken to lift the labour force participation of women, reduce the labour tax wedge

and to improve educational outcomes, while fewer actions were observed in the areas of

innovation policy, public sector efficiency or labour market regulation.

Against the background of weakening global economic prospects, there is a good case for

prioritising reforms that in addition to stimulate employment and productivity, can best

support activity in the short term.

❖

Aside from higher investment in public infrastructure, these include reductions of

barriers to entry in services sectors with pent-up demand as well as reforms in the

area of housing policies and job-search assistance to facilitate geographic and job

mobility.

❖

Countries with very limited budgetary room may have to prioritise on high short-term

returns or on low-cost measures and ensure that others are financed through means

that are as friendly as possible to employment and growth.

●

In countries where income inequality is a particular concern, the majority actions taken

on policy priorities are likely to help narrowing the income distribution.

Recent actions taken to boost growth are unlikely to help the countries with largest

current account deficits to narrow their large external imbalances.

●

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Introduction

Global growth is set to disappoint in the near term, with emerging-market economies

losing steam and the recovery in output and employment in advanced economies

remaining uneven. While labour market weaknesses are still a major challenge for many

countries, a key contributing factor across a majority of them has been the slowdown of

productivity growth, reflecting both weak investment in physical capital (machines and

equipment, physical infrastructure) and poor growth in multi-factor productivity. In most

advanced countries, the recovery in non-residential investment is lagging behind that of

GDP, substantially so among European countries (Figure 1.1). Lingering doubts about the

strength and sustainability of domestic demand, a difficult access to finance and subdued

growth prospects for the world economy are weighing down on investment (OECD, 2015a).

Figure 1.1.

Investment is lagging behind the recovery of GDP in most European countries

The difference between the 2014 and 2008 levels, as a percentage of the 2008 level

Gross domestic product

-10

-20

-30

-40

JPN

KOR

ISR

FIN

ITA

IRL

ISL

GBR

SVN

HUN

AUS

NLD

ESP

SVK

DNK

NOR

DEU

CHE

USA

SWE

GRC

MEX

CAN

CZE

FRA

POL

PRT

AUT

CHL

LUX

EST

BEL

NZL

-50

Private non-residential and government fixed capital formation¹

-10

-20

-30

-40

-50

1. The last available year is 2013 for Switzerland and Chile; 2012 for Mexico.

Source:

OECD,

Economic Outlook Database.

1 2

http://dx.doi.org/10.1787/888933323716

While the weakness of investment coincided with the crisis, the slowdown in multi-

factor productivity among advanced countries goes all the way back to the early 2000s

(Figure 1.2), an indication that deep structural weaknesses may cast a shadow on future

growth prospects. The contributing factors deserving most attention include a slowdown

in the diffusion of innovation from firms at the technological frontier – mostly

multinationals which have enjoyed steady productivity growth – to lagging firms, weaker

investment in knowledge-based capital and a decline in the pace of business start-ups

(OECD, 2015b). Yet, in many OECD countries facing stagnant or falling working-age

population and declining returns to higher education, the role of innovation as a source of

productivity gains and medium-term rises in material living standards will become even

more prevalent. In addition, many countries are still facing high long-term unemployment

or relatively high rates of labour market withdrawals, in both cases contributing to skills

erosion, social exclusion and income inequality.

Against this background, the case for ambitious structural reforms, combined with

supportive demand policies, remains strong to lift potential growth. The 2015 issue of

Going

for Growth

identified priorities and formulated explicit recommendations to address the

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Figure 1.2.

Labour productivity growth slowed even before the crisis in advanced economies

Average annual growth rate of GDP per hour worked,

percentage

-1

ITA

GBR

SWE

FRA

1990-2000

2000-07

2007-14

DEU

JPN

CAN

USA

AUS

ESP

KOR

MEX

TUR

BRA

IDN

IND

CHN

-1

1. GDP per employee for non OECD countries. For Brazil, Indonesia and Mexico data refer to 1991-2000 instead of 1990-2000.

Source:

OECD,

National Accounts and Productivity Databases

and

International Labour Organisation (ILO) Database.

1 2

http://dx.doi.org/10.1787/888933323721

key challenges. In essence, recommendations have been made i) to develop skills and

knowledge-based capital, underpinned by the quality and inclusiveness of the education

system, ii) to improve policy settings in competition and innovation to facilitate the entry

of new firms and the smooth reallocation of capital and labour towards the most

productive firms and sectors, iii) to make growth more inclusive by removing obstacles to

higher employment and labour force participation of underrepresented groups such as

women, youth, low-skilled and older workers and by encouraging faster reallocation to

new jobs and ensuring that workers can up-grade skills.

This chapter reviews the main growth challenges faced by OECD countries and

selected non-OECD economies and takes stock of actions taken that relate to policy

recommendations on reform priorities laid out in the 2015 issue of

Going for Growth.

The

priorities are selected with a view to improving material living standards through

employment and productivity gains. The policy areas covered include product and labour

market regulations, tax and benefit systems, rules affecting foreign trade and investment,

education and training, as well as innovation. The chapter specifically evaluates the extent

to which the countries have addressed such reform priorities, mainly focusing on the

actions taken in 2015. The implementation of reforms is defined as the introduction of

relevant laws and decrees or appropriate measures (such as budgetary provisions) put in

place for the reform to come into effect. It does not, however, evaluate how effectively

those legislations or measures are enforced in practice.

The next section provides a global overview of the reform momentum in 2015

compared to previous periods. The subsequent section discusses the main challenges

faced by countries and reviews actions taken on policy recommendations to address these

challenges, with a special focus on developments that have taken place in 2015. The final

section discusses the possible impact of recommendations on other important policy

objectives, namely the reduction of income inequality as well as of budgetary deficits and

current account imbalances.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

A global overview of the progress on reform priorities

On average across advanced economies, about 14% of the reform recommendations

found in the 2015 issue of

Going for Growth

have been fully implemented (that is, they were

met with relevant legislation or significant budgetary provision) in 2015, while 36% were in

the process of implementation (Figure 1.3 panel A). For emerging economies, although the

share of the

Going for Growth

recommendations that have been fully implemented

remained lower than in advanced economies, a higher proportion (44%) was in the process

of implementation (Panel B). Taken at face value, these numbers indicate a marked

slowdown in the pace of reforms in 2015 relative to the pace observed during the

period 2013-14 (Figure 1.4, “fully implemented actions”). However, considering that

legislative intensity can vary significantly from one year to the next, caution is needed in

comparing the pace reported in one year (2015) relative to the pace averaged over a two-

year period.

Still, even if one takes into account not only the policy measures fully

implemented but also the ones in the process of implementation – which may or may not

end up as fully implemented – the pace of reforms would remain below that of the past two

years (Figure 1.4, “full-implementation of in-process measures”).

Figure 1.3.

About 50 % of the

Going for Growth

recommendations have been implemented

or are in the process of implementation

Fully implemented (the adoption of relevant law etc.)

In process of implementation

Limited steps taken or no action

A. Advanced economies

B. Emerging economies

7.8%

14.2%

45.3%

49.4%

36.4%

46.9%

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The actual pace of reform is more likely to lie somewhere between these two cases,

confirming the slowdown of the reform momentum observed since the peak of 2011-12.

The deceleration is most apparent in euro area economies, where it is now similar to the

pace observed elsewhere. Furthermore, the pace of reform in the euro area (current

account) surplus economies continues to be substantially below that of euro area deficits

economies.

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Figure 1.4.

The pace of reform has decelerated in 2015

The share of implemented

Going for Growth

recommendations

0.70

0.65

0.60

0.55

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

2011-12

2013-14

2015 (fully implemented)

2015 (full implementation of in-process measures)

Advanced

economies

Emerging market

economies

Euro area deficit

economies

Euro area surplus

economies

Non-Euro EU

economies

Non-EU advanced

economies

0.70

0.65

0.60

0.55

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

1. The chart illustrates the pace of reform in previous periods captured by the indicator of reform responsiveness (RRI) and the estimated

level of responsiveness in 2015 based on two different scenarios to ensure comparability with previous two-year periods. See the

Going

for Growth 2010

issue for an explanation on RRI, and the main text on how the hypothetical RRI is computed. Following Ollivaud and

Schwellnus (2013), the euro area surplus economies are defined as the euro area members for which the current account surplus was

on average larger than 1% of GDP over the period 2000-05 (Austria, Belgium, Germany, Finland, Luxembourg and the Netherlands). The

euro area deficit economies include the remaining members of the OECD euro area (France, Estonia, Greece, Ireland, Italy, Portugal,

the Slovak Republic, Slovenia and Spain).

1 2

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While in the aftermath of the crisis, the responsiveness to

Going for Growth

recommendations tended to be higher in countries that faced more difficult

macroeconomic conditions – in particular a very high unemployment rate (Figure 1.5) –

such relationship has been less apparent more recently: a high responsiveness has been

observed across countries facing diverse macroeconomic conditions.

Figure 1.5.

The pace of reforms has been faster in countries facing hardest

macroeconomic conditions

Reform Responsiveness Indicator averaged over 2011-14

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

20 21 22 23 24 25

Unemployment rate in 2010

POL

GBR

ISR

HUN

FIN

CHN AUT AUS

CAN ITA

FRA

KOR

JPN BRA DNK

USA

RUS

NLD

DEU

TUR

NOR

CHL

LUX

SVN

CHE

SWE

BEL

CZE

ISL

0.0

MEX NZL

SVK

ZAF

PRT

IRL

EST

ESP

0.6

0.5

0.4

0.3

0.2

0.1

GRC

0.9

0.8

0.7

Source:

OECD,

Going for Growth

2013, 2015 and

Labour Force Statistics Databases.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

There is also notable heterogeneity in the responsiveness to

Going for Growth

recommendations across the main policy areas. Among the reforms that boost employment,

the largest share of recommendations with actions implemented or in the process of

implementation is observed in the area of barriers to the labour force participation of

women, where action has focused on improving access to childcare services. On the other

hand, labour taxation, especially on low-wage earners, is the area where the share of fully

implemented recommendations is the highest. In the case of reforms that enhance labour

productivity, the area where most action has taken place is education, with an emphasis on

upgrading the contents of vocational training, improving teaching quality via revised

curriculum and new evaluation system, or increasing provision of early childhood education.

In contrast, relatively few actions have been taken in the areas of labour market regulation –

where more substantial actions had been seen during the past few years – as well as in the

area of innovation support and product market regulation (Figure 1.6).

Figure 1.6.

Reform intensity has been highest in the areas of education

and of full-time labour force participation of women

Share of implemented recommendations, percentage

Fully implemented (adoption of relevant law etc.)

Reforms enhancing labour

utilisation

Policy barriers to female labour participation

Tax system-Labour tax wedge

ALMP/Unemployment Benefits

Retirement/Disability system

Job protection legislation

Human capital

PMR, Trade and FDI

Tax system-structure and efficiency

Efficiency of public spending

R&D and innovation policy

In process of implementation

Limited steps taken or no action

Reforms enhancing labour

productivity

100

1. The chart summarises the share of recommendations made in

Going for Growth 2015

by the status of their implementation. Full

implementation refers to the adoption of relevant laws or equivalent measures.

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Yet, the weak global economic prospect calls for a stronger and more broadly-based

reform efforts across countries, not least to improve confidence and prop up investment. The

case is particularly compelling for reforms that in addition to stimulate employment and

productivity can best support demand in the short term. Aside from a shift in the

composition of public spending towards infrastructure investment, this includes reductions

of barriers to firm entry in services sectors with pent-up demand as well as reforms in the

areas of housing market policies and job-search assistance that can facilitate geographic and

job mobility, thereby easing frictions in the reallocation of resources.

A welcome initiative promoting concerted actions to step up the intensity of reforms

across major economies has been launched in November 2014 by G20 governments, which

have committed to raise their collective GDP by 2018 by an additional 2% through an

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

ambitious package of structural measures and macroeconomic policies (see Box 1.1). The

structural policies were assessed by the IMF and OECD as contributing more than 2% to G20

GDP by 2018 relative to the baseline if fully implemented. According to the joint

assessment by the International Monetary Fund, OECD and World Bank, G20 countries are

making progress towards implementing their commitments but more effort is needed for

the full and timely implementation that would be needed to meet the GDP objective.

Box 1.1.

G20 Growth strategy and its implementation

In November 2014, the leaders of G20 countries agreed to “ambitious but realistic”

policies with the aim to lift the G20’s collective GDP by at least 2% above the trajectory

implied by the existing policies over the coming five years. All G20 countries submitted

Growth Strategies (GS) that consist of macroeconomic policies to stimulate demand in the

near term and structural reforms to lift employment and productivity through stronger

competition, trade, as well as public and private investment. A wide range of reforms in

product and labour markets, investments in public infrastructure, tax reforms and

innovation policies were included in the GS.

This process brought a new level of ambition to global economic cooperation in this area.

It was based on a clear quantitative target and backed up by specific and detailed reform

commitments. While the process is member-led and based on peer review, it has been

supported by analysis from international organisations including the OECD. This included

an initial assessment of the policy priorities, based in part on

Going for Growth.

Many measures committed by G20 countries in their GS overlap with reform priorities

recommended in

Going for Growth.

Examples of such measures include regulatory reforms

to reduce administrative burdens to business activities, increase spending on active labour

market policies, vocational training and childcare service, and opening up service sectors

to foreign competition.

This process was also supported by a joint quantification exercise by the IMF and the

OECD that estimated the impact of the specific policy commitments. This estimated that

the full implementation of GS would raise the G20’s collective GDP by 2.1 per cent by 2018.

The OECD, together with the IMF and World Bank, is also supporting G20 countries to

track progress on the commitments and has provided a quantitative assessment of impact

of measures implemented before the 2015 G20 Summit in Antalya, Turkey.

Assessment of reform progress by country groups

This section reviews the main challenges and actions taken by countries on priorities

identified in

Going for Growth.

For this purpose, the review of actions taken is organised

around groups of countries sharing similar challenges and priorities (Box 1.2).

Group 1: Countries with extremely high long-term and youth unemployment (Greece,

Ireland, Italy, Portugal, Slovak Republic and Spain)

Those countries, particularly hard hit by the crisis, have seen a recovery in output

(with Greece being a notable exception) as a substantial reduction in unit labour costs

improved their competitiveness. However, their unemployment rate remains painfully

high, in particular the incidence of long-term and youth unemployment, which is the

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Box 1.2.

Country grouping by common challenges

For the purpose of this review, countries are grouped according to the common nature of

the most pressing challenges as identified in the 2015 issue of

Going for Growth

and

summarised here in the following set of tables. Challenges are examined at a level that

allows for groupings that are as meaningful as possible, though some degree of

arbitrariness remains inevitable. Many countries may be confronted with a similar

challenge such as, for instance, high and persistent unemployment. But beyond this broad

challenge, countries are also distinguished according to the more specific structural

factors and policy weaknesses perceived to be contributing the most to that particular

challenge. The country groups are shown in the table below.

With many countries sharing a great deal of challenges, there are some “borderline”

cases, i.e. countries that could legitimately belong to another group than the one assigned

in this exercise. For instance, Finland has been grouped with Austria, Belgium, France,

Luxembourg and Slovenia on the basis of challenges such as low labour force participation

of older workers and persistently high unemployment. However, it could also be seen as

belonging to a group comprising mainly of Nordic countries.

Similarly, a few countries only share part of the characteristics on their group. For

example, persistently high unemployment is not as big a concern in Austria as it is for

other countries in the group. In fact, one country – Iceland – could not be fitted in any

group and is not covered in the report. The European countries form four groups, while

the rest of the OECD and BRIICS account for another four groups. The EU as such is

not considered as a country and not covered in this report, although it is given

recommendations in the

Going for Growth.

For further details on the identification and selection of reform areas as well as underlying

empirical literature, see past issues of

Going for Growth.

Country Group

Group 1

Group 2

Group 3

Group 4

Group 5

Countries

Greece, Ireland, Italy, Portugal,

Slovak Republic, Spain

Czech Republic, Estonia, Hungary,

Israel, Poland, Latvia

Denmark, the Netherlands, Norway,

Sweden

Austria, Belgium, Finland, France,

Luxembourg, Slovenia

Australia, Canada, New Zealand,

Switzerland, United Kingdoms,

United States

Germany, Japan, Korea

Main challenges

Extremely high youth and long-term

unemployment

Large productivity gap vis-à-vis

advanced OECD countries

Strengths

Past labour market reforms improved

cost competitiveness

High cost competitiveness and strong

manufacturing base

Low average working hours and risks Highest productivity level among

in housing markets

the OECD countries

High unemployment and early exit

from labour market

Sluggish productivity growth

and low return to KBC investment

Low productivity in services sectors

and limited full-time labour

participation by women

Large productivity gap vis-à-vis

the advanced OECD countries

High productivity levels

Relatively flexible product and labour

markets

Good manufacturing export

performance and relatively low

unemployment

Large room for catch-up and strong

manufacturing base or abundant

natural resources

Group 6

Group 7

Chile, China, Mexico,

Russian Federation

Turkey, Brazil, Colombia, Indonesia,

India, South Africa

Group 8

High labour informality, infrastructure Large room for catch-up and high

shortages and low educational

population growth

attainments

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

highest among OECD countries (Figure 1.7). Such high long-term unemployment

undermines long-run growth through skills erosion and reduces the prospect of career

building and social mobility for affected youth, with the risk of a further widening of

income inequality (OECD, 2015c).

Figure 1.7.

Youth unemployment rate and the share of long-term unemployed remain very high

Percentage, 2014

Youth unemployment rate (15-24)

ESP

GRC

ITA

PRT

SVK

IRL

POL

FRA

BEL

SWE

LUX

HUN

SVN

OECD

FIN

TUR

CHL

GBR

CZE

NZL

EST

CAN

USA

AUS

NLD

DNK

ISR

AUT

KOR

ISL

MEX

CHE

DEU

NOR

JPN

Long-term unemployment rate (% of total unemployed)

1. Data for long-term unemployment for Korea refer to 2013.

Source:

OECD,

Labour Force Statistics Database.

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Addressing youth and long-term unemployment requires the mobilisation of a broad

range of policies…

The most pressing agenda for these countries is to mobilise a broad range of policies

to improve job opportunities for the unemployed and to facilitate their return to work.

Furthermore, reforms that raise productivity must be pursued to ensure mid- to long-term

recovery in output and employment. All countries in this group should extend and improve

the effectiveness of active labour market policies (ALMPs), in particular those related to

job-search assistance, training programmes and hiring subsidies. Resources allocated to

ALMPs in comparison to the caseloads are well below OECD average in those countries.

Recent policy actions in this area include:

●

As the part of the

Jobs Act,

Italy has established the Active Labour Market Policies Agency

(Agenzia

Nazionale per le Politiche Attive del Lavoro

or ANPAL) that coordinates ALMPs

implemented by local authorities and those by the authority of the Ministry of Labour.

Measures to ensure more effective monitoring and evaluation of ALMPs are also in

the pipeline.

Portugal launched in April 2015 the 43 million Euro programme “Reactivar” that seeks to

improve job prospects for the long-term unemployed over 30 years of age by financing

internships in the private sector during six months.

The Slovak Republic implemented subsidies to support the first jobs for youth under 29.

Furthermore, it is engaging in several reforms to enhance the effectiveness of ALMPs such

as establishing a first point contact in Public Employment Services that allows more

individualised job-search support or reallocation of labour officers in order to reduce the

caseload per officer by half.

ECONOMIC POLICY REFORMS 2016: GOING FOR GROWTH INTERIM REPORT © OECD 2016

●

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

●

Spain launched a new activation programme targeted at the long-term unemployed. It

also introduced a reform of vocational training programmes that focuses on the specific

needs of firms, while opening to competition the provision of training programs. The

quality control of activation measures were also strengthened.

Other important labour market reforms recommended to those countries would

enhance the effectiveness of ALMPs. They include expanding the coverage of

unemployment benefits to workers not covered (Greece, Italy and Portugal), narrowing the

gap in job protection between regular and non-regular workers (Italy and Spain) and

increasing the flexibility of wage formation by reducing further the administrative

extension of sectorial bargaining (Portugal and Spain). These countries have been quite

active in those areas in recent years: notably Spain and Portugal have been engaging in

reforms of employment protection and wage bargaining systems (OECD, 2014a and 2014b).

Most recently, Italy introduced a new employment contract with a less costly dismissal

procedure, along with the new social insurance for employment extending its coverage

while making benefits conditional on participation in active labour market programmes.

… together with reforms that increase educational attainment and employability

of youth.

Raising graduation rates from higher education – while ensuring that the skills

acquired better match labour market needs – will also improve youth employment

prospects and long-run productivity growth. Common priorities include raising the quality

of compulsory education and tertiary education by improving autonomy and

accountability of schools and universities. A particularly important related reform is to

increase the provision of vocational education and training (VET) with a better curriculum

and participation of employers and, beyond schooling, to improve access to job-related

training.

Recent policy actions in this area include:

●

In Spain, the reform of vocational training programmes mentioned above provides

life-long training opportunities for employed workers.

The Slovak Republic introduced a new funding system for secondary vocational schools

which allocates funds according to the performance of students in the labour market.

●

Reducing administrative burdens and entry barriers to specific sector would contribute

to job creation and competitiveness

Reducing the regulatory barriers to entry as well as the compliance costs associated

with complex regulations can stimulate business expansion and job creation. The

employment gains can be particularly rapid in industries with large pent-up demand and

low entry costs (such as some professional services) (See Chapter 2). Stronger competition

also fosters the reallocation of jobs from lower- to higher-productivity firms within sectors,

thereby improving the allocation of skills (OECD, 2015b; Adalet McGowan and

Andrews, 2015). The productivity gain expected from improving the matching between

workers’ skills and the skills level required for their job is particularly large in some of

these countries (Figure 1.8). Stronger product market competition would also facilitate

labour market reforms (Blanchard and Giavazzi, 2003). This allows for lower unit labour

costs which translate into lower prices, improving competitiveness as well as real wages in

these countries.

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Table 1.1.

Reform priorities for countries with high long-term

and youth unemployment

GRE

Unemployment benefits/social protection and ALMPs

Make UB conditional on work availability and job-search

criteria/reinforce activation

Taper UB along duration/reduce age-bias in UB/reduce

progressively the combined generosity of UB and other

social benefits (i.e. reduce spikes in marginal effective

tax rates)

Expand the coverage or level of UB/social protection

and social services

Strengthen resources for job-search assistance

and training whilst improving targeting of ALMPs

Focus on well-targeted training programs/requalification

Strengthen monitoring and evaluation of PES

Job protection

Ease EPL on regular workers to narrow the gap with respect

to non-regular workers and tackle labour market duality

Minimum wages and wage bargaining systems

Reduce or eliminate administrative extension

of collective wage agreements

Human capital

Early childhood education

Expand access to quality childcare and early education/

improve targeting

Primary and secondary education

Improve curricula and evaluation

Other recommendations (reduce dropout, reduce

inequality in educational outcomes and opportunities)

Tertiary education

Increase university autonomy and accountability

or specialisation by institutions

Introduce/raise tuition fees flanked by income-contingent

loans/mean-tested grants, Improve targeting

of means-tested financial assistance

Expand access to and effectiveness of apprenticeships

and VET and their relevance to labour market needs

Expand access to and effectiveness of lifelong/job-related

education and training

Reduce economy-wide regulatory burdens

Reduce administrative burden on start-ups/complexity

of regulatory procedure

Reduce the scope of public ownership/state intervention

Ease business exit/bankruptcy procedures

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Retail trade and professional services

R&D and innovation

Increase public support/Improve targeting of public

support/evaluate grant programs

Increase and/or reform indirect R&D support –

tax incentives, seek balance between direct

and indirect support

Strengthen collaboration between research centres/

universities and industry

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

IRL

ITA

PRT

SVK

ESP

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

1. R stands for recommendation in that area, A stands for any actions that are implemented or in the process

of implementation.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Recent policy actions taken in this area include:

●

Ireland introduced the Legal Service Regulation Bill which would establish an

independent regulator for the legal profession.

Italy introduced relevant decrees aimed at improving the efficiency in the civil courts

and at streamlining bankruptcy procedures.

Spain is implementing the Market Unity Law that addresses internal market fragmentation

for product and service markets and simplifies business licencing and other administrative

burdens. It also took steps to liberalise passenger transport in railways.

●

Figure 1.8.

A significant share of workers face skill mismatch, implying

a large scope for productivity gains

Percentage of workers with skill mismatch and implied gain in productivity from reducing mismatch,

selected OECD countries,

2011-12

Percentage of workers with skill mismatch (left axis)

Gains to labour productivity from reducing skill mismatch (right axis)

POL CAN BEL SWE USA FRA NLD DNK JPN FIN EST KOR GBR NOR SVK AUS DEU AUT IRL CZE ESP ITA

1. The figure shows the percentage of workers who are either over or under-skilled and the simulated gains to allocative efficiency from

reducing skill mismatch in each country to the best practice level of mismatch. The figures are based on OECD calculations using

OECD,

Survey of Adult Skills

(2012). Data for Greece and Portugal are missing.

Source:

M. Adalet McGowan and D. Andrews (2015), “Labour Market Mismatch and Labour Productivity: Evidence from PIAAC Data”, OECD

Economics Department Working Papers

No. 1209.

1 2

http://dx.doi.org/10.1787/888933323785

Group 2: Countries with a large labour productivity gap

vis-à-vis

OECD average

(Czech Republic, Estonia, Hungary, Israel, Poland and Latvia)

Those countries have most recently enjoyed relatively strong growth led by household

consumption and exports. They also benefit from strong trade linkages with more

advanced European economies, in particular in the case of the Czech Republic, Slovak

Republic and Hungary, which are deeply integrated into their global value chains. Israel

boasts a competitive and innovation-intensive manufacturing sector. However, the gap in

labour productivity

vis-à-vis

the upper half of OECD countries remains large and with the

exception of Poland, convergence has been slow or even stalled since the crisis (Figure 1.9).

Weak productivity in the protected sectors accounts for much of productivity gap and slow

catch-up, especially in Israel (OECD, 2016).

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Figure 1.9.

The productivity gap remains large with ample room for catch-up

Percentage difference in GDP per hour worked

vis-à-vis

the upper half of OECD countries

Source:

OECD,

National Accounts, Productivity and Economic Outlook Databases.

1 2

http://dx.doi.org/10.1787/888933323792

LUX

NOR

USA

BEL

NLD

FRA

DNK

IRL

DEU

CHE

SWE

AUT

AUS

FIN

ESP

ITA

CAN

GBR

ISL

SVN

JPN

NZL

SVK

ISR

GRC

CZE

PRT

KOR

HUN

TUR

EST

POL

LVA

CHL

MEX

-10

-20

-30

-40

-50

-60

-70

-80

2014

2008

-10

-20

-30

-40

-50

-60

-70

-80

While these countries are considerably more competitive than other European

countries in terms of labour costs, this advantage is expected to wane as their wage level is

likely to rise with their further economic development. In order to remain competitive,

they must therefore reinvigorate productivity growth via a wide range of reforms in

product and labour markets, investment in human capital and innovation.

Regulatory reforms to boost competition and entrepreneurship

In the product market, those countries are recommended to remove red tapes across

the board (Hungary and Israel), reduce the scope of public ownership (Czech Republic,

Poland and Latvia), and to lower entry barriers in network industries and professional

services (Czech Republic, Hungary, Israel, Poland and Latvia). Easing the strictness of

regulation in network industries (e.g. energy, telecommunications and transport) as well as

in retail and professional services would improve productivity and competitiveness in

downstream sectors, not least manufacturing, which use services from these upstream

industries as inputs for their own production (Bourles et al., 2010). This “knock-on” effect

of regulation in upstream industries on manufacturing through input-output linkages is

particularly strong in several of the countries of this group (Figure 1.10). Furthermore, such

product market reforms would put greater emphasis on new firm entry as a means to

strengthen competition, encouraging incumbents to increase innovation efforts to protect

their market shares.

Recent actions in this area include:

●

Poland introduced a law facilitating seaport customs clearance and compliance to tax

laws and information obligations, lowering thereby trade barriers. It also enacted laws

stipulating further reductions of entry barriers in professional services while improving

the legal framework for corporate restructuring.

Latvia introduced a law requiring specific measures to improve the governance of state-

owned enterprises.

●

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Figure 1.10.

Regulations in non-manufacturing sector have significant impact

on the manufacturing sector

The indicator of regulatory impact on manufacturing sector,

index scale from 0 to 1, 2013

JPN

ISR

FIN

CHE

ESP

KOR

CAN

NOR

SVN

DEU

SVK

NLD

HUN

MEX

ITA

IRL

GBR

GRC

LUX

DNK

EST

SWE

TUR

AUS

CZE

FRA

CHL

1. The figure compares the impact of regulation in upstream network industries (ETCR) as well as in retail and professional services, on

manufacturing sector. The impact indicator is computed using the 2013 definition of PMR indicator and domestic input-output

coefficients (except that of Korea which uses US input-output coefficient) and normalised across countries as an index that takes a

value between 0 (minimum value across observations) and 1 (maximum value). Data for Latvia are missing.

Source:

Égert and Wanner (2015), “The Regulatory Impact Indicator: the 2013 Vintage”, OECD

Economic Department Working Papers,

forthcoming.

1 2

http://dx.doi.org/10.1787/888933323807

Higher investment in human capital and innovation capability

Ensuring a sufficient supply of skilled workers is essential for these countries to retain

and upgrade their comparative advantage in manufacturing. Raising the quality of tertiary

education and vocational education and training (VET) is of particular importance in

smooth school-to-work transition and skills development.

Recent policy actions in this area include:

●

The Czech Republic made an amendment to the Higher Education Act, aimed at

increasing the quality of higher education by reforming the accreditation of institution

and study programmes.

Estonia approved a law introducing quality standards and increasing the visibility of

adult training. A system for labour market monitoring and forecasting will be

operational in 2016. It also introduced a new grant system for university students which

offers flexible conditions and strengthened support to students of poor socio-economic

background.

In Hungary, the transition from secondary to upper-secondary vocational school has

been facilitated and the share of practice-oriented training in VET programmes has been

increased.

Poland implemented measures to engage employers to provide more workplace training

for secondary vocational education, such as an obligation for vocational university

programmes to contain at least a three-month apprenticeship or for companies

operating in special economic zones to collaborate with schools to develop their

educational programmes.

●

POL

AUT

PRT

NZL

BEL

0.14

0.13

0.12

0.11

0.10

0.09

0.08

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0.00

0.14

0.13

0.12

0.11

0.10

0.09

0.08

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0.00

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

With the notable exception of Israel, the intensity of business-based R&D in those

countries remains below the level in advanced OECD countries (Figure 1.11). An increase in

investment in innovation, especially in the ICT sector that often experiences high

productivity growth and acts as an input driving productivity growth in other sector, would

strengthen their competitiveness in the medium- to long-run. While a better targeting of

R&D support and a stronger university-industry linkage would enhance the effectiveness

of innovation system in those countries, significant actions have not yet been observed in

area of innovation policy.

Figure 1.11.

The intensity of business-based R&D is low compared to advanced OECD countries

Business based R&D as a percentage of GDP,

2013

3.5

ICT BERD

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Rest of BERD

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

ISR

FIN

IRL

ITA

ISL

SVK

NOR

SWE

1. BERD refer to Business expenditure on R&D. Data refer to 2012 for Czech Republic, Denmark, Estonia, Finland, France, Germany,

Hungary, Israel, Italy, the Netherlands, Norway, Poland, Portugal, Romania, Slovenia, Spain Switzerland and the United Kingdom; 2011

for Australia, Austria, Belgium, Greece, Iceland, Ireland, Mexico, New Zealand and the United States. The ICT sector is defined

according to the OECD ICT sector definition based on ISIC Rev.4. Data for Latvia are missing.

Source:

OECD (2015),

OECD Digital Economy Outlook

2015, OECD Publishing, Paris.

1 2

http://dx.doi.org/10.1787/888933323813

Growth-friendly tax reform that reduces the labour tax wedge would enhance

employment

Those countries also share persistently high long-term unemployment that is partly

due to the high labour tax wedge discouraging the return to work. They are thus

recommended to reduce the burden of labour income taxation by relying more on less

distortive taxes such as VAT, environmental and immovable property taxation. Recent

policy actions in this area are:

●

Estonia raised the level of tax-free allowance and will allow low-income full-time

workers to apply for a tax rebate from 2017. At the same time, taxes on alcohol, fuel and

gas are to be raised.

Hungary approved a legislation that reduces its flat income tax rate from 16% to 15%

from 2016.

Poland reformed the fragmented tax and social security regimes across different labour

contracts by a law that makes all civil law contracts subject to the same social security

contributions up to the minimum wage.

●

ECONOMIC POLICY REFORMS 2016: GOING FOR GROWTH INTERIM REPORT © OECD 2016

GRC

GBR

CHN

HUN

KOR

MEX

ESP

SVN

CAN

TUR

NLD

CHE

DNK

DEU

USA

FRA

AUS

CZE

PRT

AUT

POL

BEL

EST

JPN

NZL

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Table 1.2.

Reform priorities for countries with a large labour productivity

gap

vis-a-vis

OECD average

CZE

Reduce economy-wide regulatory burdens

Reduce administrative burden on start-ups/complexity

of regulatory procedure

Strengthen the competition framework

Reduce the scope of public ownership/state intervention

Improve corporate governance of state-owned

enterprises

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Retail trade and professional services

Reduce barriers to FDI and international trade

Human capital

Early childhood education

Expand access to quality childcare and early

education/improve targeting

Primary and secondary education

Postpone early tracking

Other recommendations (Improve teaching quality,

reduce inequality in educational outcomes

and opportunities)

Tertiary education

Increase university autonomy and accountability

or specialisation by institutions

Introduce/raise tuition fees flanked by income-contingent

loans/mean-tested grants, Improve targeting

of means-tested financial assistance

Expand access/enrolment/reduce inequalities in access

Expand access to and effectiveness of apprenticeships

and VET and their relevance to labour market needs

Expand access to and effectiveness of lifelong/job-related

education and training

Provision and regulation of public infrastructure

Raise public and private investment in infrastructure

Enhance capacity/quality in transport, energy

or telecommunication/enhance connectivity

Introduce/increase/reform price signals/congestion

charges and user fees

R&D and innovation

Improve targeting of public support/evaluate

grant programs

Strengthen collaboration between research

centres/universities and industry

Tax system – labour tax wedges

Reduce average/marginal labour tax wedges

Reduce labour tax wedges for low-wage workers

(introduce/expand EITC)

Tax system -structure and efficiency

Shift the tax burden from personal income taxes toward

consumption, immovable property and the environment

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

EST

HUN

ISR

POL

LVA

✓

•

✓

•

1. R stands for recommendation in that area, A stands for any actions that are implemented or in the process

of implementation.

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Group 3: Countries with low working hours and housing market distortions

(Denmark, the Netherlands, Norway and Sweden)

These countries enjoy the highest labour productivity among OECD countries and

also a relatively high employment rate thanks to strong labour force participation of

women. However, their average working hours remain substantially below the OECD

average and a relatively high share of working-age population are receiving disability

benefits compared to other OECD countries (Figure 1.12). These indicate further room to

improve labour resource utilisation. Therefore, the reform priority for these countries is to

reduce the policy disincentives to work longer hours and to remain in the labour force,

namely the high tax burden on labour and the generous sickness and disability benefit

system.

Figure 1.12.

The share of disability benefit recipients is among the highest in OECD countries

Percentage of population aged 20-64 years old receiving disability benefits

FIN

NOR

SVN

EST

HUN

NLD

GBR

DNK

SVK

USA

ESP

JPN

ISR

ISL

ITA

IRL

SWE

KOR

MEX

LUX

DEU

CAN

BEL

CHE

CZE

AUS

FRA

AUT

PRT

POL

NZL

2012

2000

1. Disability benefits include benefits received from schemes to which beneficiaries have paid contributions (contributory), programmes

financed by general taxation (non-contributory) and work injury schemes. The last available year is 2014 for Estonia; 2013 for

Australia, Czech Republic, Finland and the United States; 2010 for Spain; 2009 for Mexico; 2008 for Austria, Japan and Korea; 2007 for

Canada and France; 2005 for Luxembourg. For 2000, data refer to 2004 for Poland; 2003 for Japan and Mexico; 2002 for the Netherlands;

2001 for Ireland.

Source:

Secretariat updates of figures published in OECD (2010),

Sickness, Disability and Work: Breaking the Barriers: A Synthesis of Findings

across OECD Countries,

OECD Publishing, Paris.

1 2

http://dx.doi.org/10.1787/888933323821

Making work pay more while preventing early withdrawal from labour market

Countries in this group are recommended to reduce the relatively high corporate and

labour income tax rates by shifting the tax burden to property and indirect taxation, such

as value-added tax (VAT), and also to remove tax expenditure on owner-occupied housing.

The high marginal tax wedge on labour income is hindering the work incentives of low-

income households and second-income earners in the Netherlands, while it is

discouraging above-average income earners to work longer hours in Sweden

(OECD, 2015d). As an example of recent actions in this area, Norway has increased the tax

value of secondary homes to 80% of market value and has streamlined tax expenditures

while reducing the income tax rates in a step-wise manner.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Tightening access to sickness and disability schemes and re-orienting them towards

back-to-work and job-search objectives would help maintaining workers in the labour force.

Taking a step in this direction, Norway has reduced the generosity of disability benefit

calculation and is implementing a faster tapering rule for disability benefits and new

medical assessment for sickness benefits. Also, complementary reforms to curb alternative

channels to withdraw early from the labour market are needed, such as a tightening of

unemployment benefit entitlements. No action has been observed recently in this area.

Removing housing market rigidities to promote labour mobility and macroeconomic

stability

Another reform priority for those countries is to address housing market rigidities.

Stringent regulation on land planning and rent control as well as tax subsidies for owner-

occupied housing are depressing housing supply. This not only impedes efficient labour

mobility but also results in elevated housing prices, posing macroeconomic risks via higher

household debt level. The rise in housing price has been remarkably fast in some of these

countries contributing to an elevated household debt, especially in Denmark (Figure 1.13).

Recent actions in this area include:

●

The Netherlands reformed its rent control by increasing the extent to which the rent

reflects the property value.

Sweden has put forth a new housing plan that includes measures to streamline land-use

planning and incentives for municipalities to release land.

●

Figure 1.13.

House prices have risen fast amid large household debt

Percentage

160

Real house price, % change over 2000 Q1 and 2015 Q2¹ (left axis)

140

120

100

-20

-40

SWE NZL AUS CAN NOR GBR FRA CHE BEL ISR DNK KOR AUT FIN ESP USA IRL ITA CHL DEU NLD GRC JPN PRT

Percentage of gross disposable income

500

Household gross debt, 2014² (right axis)

450

400

350

300

250

200

150

100

1. The last available data refer to 2015 Q3 for Canada, Finland, the United Kingdom, Greece, Korea, Norway and the United States; For

Chile, data refer to 2002 Q1 and 2014 Q3.

2. The last available year is 2013 for Japan and Switzerland.

Source:

OECD,

Prices and Purchasing Power Parities

and

Economic Outlook Databases.

1 2

http://dx.doi.org/10.1787/888933323832

Better resource allocation and improved human capital would help further boost

productivity

In order to sustain their relatively high productivity level in the medium run, Nordic

countries need to reduce the scope of public ownership in network industries and entry

barriers in retails and professional services. They also have room to enhance the

performance of their education system by developing school evaluation frameworks, in

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

particular by improving teacher quality and strengthening vocational education and

training. Norway and Sweden have increased budget resources to raise teacher

qualification and salaries. The Netherlands and Sweden are recommended to reduce the

strictness of employment protection of regular workers, which would improve productivity

by enhancing the allocation of labour resource.

Table 1.3.

Reform priorities for countries with low working hours

and housing market distortions

DNK

Unemployment benefits/social protection and ALMPs

Make UB conditional on work availability and job-search criteria/

reinforce activation

Retirement and disability policies

Phase out early retirement pathways

(via disability or unemployment)

Review criteria to disability benefits, improve monitoring

and integration with ALMPs

Job protection

Ease EPL on regular workers (shorten judicial procedure, reduce

severance pay), narrow the gap with respect to non-regular

workers and tackle labour market duality

Ease conditions for justified individual or collective dismissals

Tax system – labour tax wedges

Reduce labour tax wedges

Tax system -structure and efficiency

Shift the tax burden from personal income taxes toward

consumption, immovable property and the environment

Broaden the tax base – reduce tax expenditures/subsidies

Housing/Planning/Zoning policies and regulations

Remove obstacles to the expansion of a private residential

market/reduce rent regulation

Improve targeting or reduce the use of housing subsidies/improve

targeting in the provision of social housing

Reduce/eliminate preferential tax treatment for housing

investment/reform property taxation

Loosen/reform land, zoning and planning restrictions

Reduce economy-wide regulatory burdens

Reduce the scope of public ownership/state intervention

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Retail trade and professional services

Human capital

Primary and secondary education

Improve teaching quality/improve incentives for talented teachers

(especially to work in difficult schools)

Improve incentives to secondary education completion/focus

on reduce dropout

Expand access to and effectiveness of apprenticeships

and VET and their relevance to labour market needs

Expand access to and effectiveness of lifelong/job-related

education and training

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

NLD

NOR

SWE

✓

•

✓

1. R stands for recommendation in that area, “A” stands for any actions that are implemented or in the process

of implementation.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Group 4: Countries with high structural unemployment and/or low participation

of older workers (Austria, Belgium, Finland, France, Luxembourg and Slovenia)

The countries in this group are also enjoying levels of productivity that are among the

highest within OECD countries (Slovenia being an exception), but their unemployment

rates remain considerably above pre-crisis levels (except Austria), which along with low

labour force participation rates and low average working hours, contribute to low overall

labour resource utilisation (Figure 1.14). To a large extent, the low labour force participation

rate reflects the early exit of older workers from labour markets.

An important reform agenda for those countries is to boost employment by reducing

the institutional disincentives to labour embedded in the unemployment benefits and

pension systems. To ensure that reforms enhancing labour supply result in increased

employment, measures to remove impediments to job creation are also advocated, such as

lowering tax wedges for low-income earners and reducing entry barriers to industries with

strong potential growth.

Figure 1.14.

Shorter average hours worked and lower employment rates reduce

overall labour utilisation

Percentage difference in labour utilisation

vis-à-vis

the upper half of OECD countries, 2014

Hours worked

-10

-20

-30

KOR

CHE

ISL

MEX

NZL

ISR

JPN

CHL

CAN

POL

EST

CZE

LUX

AUS

AUT

PRT

USA

OECD

HUN

SWE

GBR

GRC

IRL

SVK

FIN

NOR

NLD

DEU

DNK

SVN

ITA

ESP

TUR

BEL

FRA

-40

Employment rate

Working age population

Total

-10

-20

-30

-40

1. Employment rate is measured as total number of employed divided by working-age population. Hours worked are measured as total

number of hours worked per employed. Working-age population is measured as working-age population divided by total population.

The total of the three components is not equal to labour resource utilisation since the decomposition is multiplicative.

Source:

OECD,

National Accounts, Productivity, Employment Outlook

and

Economic Outlook Databases.

1 2

http://dx.doi.org/10.1787/888933323847

Institutional disincentives to job search and labour supply should be removed

In order to encourage more intensive job search, these countries are recommended to

reduce the generosity of unemployment benefits as the duration of the spell lengthens and

to activate job-search assistance and conditions at an earlier stage of the spell.

Furthermore, they also need to reduce labour tax wedges, which are among the highest in

OECD countries, and are particularly reducing job opportunities and incentives to take-up

work for low-income earners.

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Recent policy actions include:

●

Austria in its latest tax reform has reduced the bottom statuary income tax rate.

Furthermore, earners with income below the first income bracket will be eligible for a

reimbursement of half of their social security contributions, up to EUR 400 per year.

Belgium has reduced the level of part-time unemployment benefits and tightened the

access to unemployment benefits for young people who have insufficient work

experience. It also introduced a revenue-neutral shift in the tax burden from labour

income to consumption and capital.

Finland has put in place a joint service involving central and local government bodies

that targets the long-term unemployed to improve the labour market skills and

employability.

In France, the earned-income tax credit providing incentives for workers to join the

labour force has been raised through the integration and a better targeting of two

existing measures.

●

Closing the pathway to early exit from labour markets

Encouraging older workers to remain in the labour market requires that a number of

measures be taken to raise financial incentives to pursuing activity, but also that the

working life evolves along with increases in life expectancy. The most essential reform is to

increase the statutory retirement age and to re-design contribution and disbursement of

pension so that it does not penalise continued work. Furthermore, these countries need to

tighten access to programmes such as unemployment insurance or disability benefits that

are often used as pathways to early retirement. On the other hand, provision of activation

measures such as job placement services and life-long training are also important to

support the attachment of older workers to labour market. Significant pension reforms

were put in place during the 2010-12 period, notably to help restore public finance

sustainability, but further action is needed to encourage the pursuit of activity at older age.

More recent policy actions in this area include:

●

In Belgium, pension age is gradually increased to 67 years by 2030 and incentives for

early retirement are being curbed.

Finland reoriented the wage subsidy system to those who are in the most difficult labour

market situations, namely to the long-term unemployed over 60 years old.

In France, an agreement reached by social partners will raise incentives for workers

covered by complementary pensions to remain in the labour force at older age.

●

Removing impediments to job creation will help to absorb more workers into employment

Reforms to increase labour supply may not increase employment in the short run,

especially during difficult macroeconomic conditions (See Chapter 2). To this end,

complementary reforms that boost hiring and job creation are needed, such as reducing

regulatory barriers to entry in industries with large scope for job creation.

●

In France, a recent reform (Loi

Macron)

eases somewhat entry regulation in legal services

and facilitates the creation of firms that can offer a wide range of legal and accounting

services in the same entity. It also expands the possibility for stores to open on Sundays,

especially in specific areas defined as touristic zones (albeit subject to agreements

between store management and unions) and introduces a partial liberalisation of long-

distance passenger coach services.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Table 1.4.

Reform priorities for countries with high structural unemployment

and low participation of old workers

AUT

Unemployment benefits/social protection and ALMPs

Make UB conditional on work availability and job-search

criteria/reinforce activation

Taper UB along duration/reduce age-bias in UB/reduce

progressively the combined generosity of UB

and other social benefits (i.e. reduce spikes in marginal

effective tax rates)

Tax system – labour tax wedges

Reduce average/marginal labour tax wedges

Remove tax and benefit disincentives to low earners

full-time participation/introduce or expand EITC

Tax system -structure and efficiency

Shift the tax burden from personal income taxes toward

consumption, immovable property and the environment

Broaden the tax base – reduce tax expenditures

Retirement and disability policies

Phase out early retirement pathways (via disability

or unemployment)

Increase statutory or minimum retirement age

Lengthen contribution requirements to claim full

pension/make benefits actuarially neutral

Adjust benefits/retirement age in line with life expectancy

Job protection

Ease EPL on regular workers to narrow the gap

with respect to non-regular workers and tackle

labour market duality

Ease conditions for justified individual or collective

dismissals

Minimum wages and wage bargaining systems

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Retail trade and professional services

Human capital

Primary and secondary education

Improve teaching quality/improve incentives for talented

teachers (especially to work in difficult schools)

Other recommendations (reduce inequality in educational

outcomes and opportunities, etc.)

Tertiary education

Increase university autonomy and accountability

or specialisation by institutions

Introduce/raise tuition fees flanked by income-contingent

loans/mean-tested grants, improve targeting of means-

tested financial assistance

Other recommendations (reduce inequalities in access etc.)

Expand access to and effectiveness of lifelong/job-related

education and training

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

BEL

FIN

FRA

LUX

SVN

✓

•

✓

•

✓

•

✓

1. R stands for recommendation in that area, A stands for any actions that are implemented or in the process

of implementation.

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Stronger equity in educational attainment and access to skills formation would

increase employability and productivity

While the education systems in those countries yield relatively high performance on

average, the individual scores are also strongly influenced by the pupil’s socio-economic

background (Figure 1.15). Education reforms that promote successful outcomes for all

students, in particular those allocating more resource to schools with larger

concentrations of students from disadvantaged background, would promote equality of

opportunities, social mobility and long-term growth. Similarly, better access to higher

education and skills formation opportunities such as VET and life-long training would

facilitate school-to-work transitions and enhance the employability of the low-skilled

workers. As an example of recent policy actions, France introduced a new individualised

guidance system designed for secondary-school students to prevent early drop out. It also

put in place priority education networks that allocate funding and teacher trainings across

schools based on the social characteristics of their students.

Figure 1.15.

Inequality in educational outcomes is relatively high

2012

PISA mean mathematic score

650

OECD average

600

KOR

550

500

450

400

350

OECD average

POL

NLD CHE

AUT

JPN

DEU NZL BEL

EST

IRL SVN

AUS

CAN

DNK

CZE

LVA

GBR

ITA

NOR ISL

LUX PRT

ESP

USA

SWE RUS

ISR

TUR

GRC

MEX

BRA

IDN

COL

FIN

550

500

FRA

HUN

CHL

400

350

SVK

450

CHN

600

650

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

Source:

OECD (2013),

PISA 2012 Results: Excellence through Equity (Volume II): Giving Every Student the Chance to Succeed.

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Group 5: Countries with sluggish productivity growth despite relatively high

investment in knowledge-based capital (Australia, Canada, New Zealand,

Switzerland, United Kingdoms and United States)

Countries from this group have recently seen a slowdown in growth (except

New Zealand and the United Kingdom), as investment remained subdued, contrasting

with a comparatively good employment performance. Relatively low rates of youth and

long-term unemployment indicate that these countries have generally been successful at

keeping lower-skilled workers in the labour force. The flip side is persistently weak

productivity growth, in particular gains in multifactor productivity, despite comparatively

high investment in knowledge-based capital and a business environment generally

favourable to entrepreneurship, in addition to flexible labour markets.

At the same time, boosting productivity requires that a number of common structural

weaknesses be addressed, in particular in the areas of educational outcomes – to ensure

that educational qualification translates into skills – public spending efficiency, tax

revenue structure and public infrastructure.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Ensuring further equity in access to high quality education would enhance

human capital

The performance of high-school students from these countries in PISA tests in science

and reading proficiency is only around the international average and with a tendency in some

cases (Australia, New Zealand and the United Kingdom) to show a high variation across

students. These countries need to reduce inequality in access to education at all levels.

Increasing the supply and quality of early childhood education and care (ECEC) is of particular

importance, as it influences the participation and performance of students at higher education

levels. In these countries, expenditure on early childhood education is relatively low, which in

some cases is reflected in enrolment rates (Figure 1.16). Reforms should be targeted to

minorities and less advantageous social groups, in order to raise equality of opportunities and

social mobility. Efforts are made by these countries to expand the supply of, and to raise

enrolment in ECEC. For example, the United Kingdom has committed to double the

entitlement to free childcare for working families with 3 and 4 year-old children from 2017.

Figure 1.16.

Expenditure on early childhood education is relatively low while enrolment

rates can be raised for some countries

120

100

Enrolment rates (%) at age 3 in early childhood and pre-primary education, 2013 (left axis)

Expenditure on early childhood educational institutions as a % of GDP, 2012 (right axis)²

2.4

2.0

1.6

1.2

0.8

0.4

0.0

1. Early childhood education target children aged below the age of entry into ISCED level 1. There are two categories of ISCED level 0

programmes: early childhood educational development (ISCED 01) and pre-primary education (ISCED 02). Data for Canada are missing.

2. Public and private expenditure. The last available year is 2013 for Indonesia. Public expenditure only for Switzerland and public

institutions only for Italy, Poland, Portugal and Switzerland. Data for Canada are missing.

Source:

OECD (2015),

Education at a Glance

2015:

OECD Indicators.

1 2

http://dx.doi.org/10.1787/888933323869

ISR

FRA

BEL

GBR

DNK

NZL

ISL

ESP

NOR

ITA

SWE

DEU

EST

SVN

NLD

JPN

PRT

OECD

AUT

LUX

FIN

SVK

AUS

CZE

POL

CHL

IRL

MEX

USA

TUR

CHE

Most countries in this group have faced substantial increases in income inequality

during the past few decades. In some cases, there is evidence (the United States in particular)

that strong investment in ICT and complementary organisational changes have resulted in

faster replacement of workers by machines and software to perform specific tasks, while

increasing the demand for workers with complementary skills, favouring those with higher

skill levels (Brynjolfsson and McAfee, 2011). A wider access to higher education and effective

VET programmes can help mitigate the impact of skill-biased technological progress on

income inequality. As an example of recent actions in this area, the United States enacted

the Workforce Innovation and Opportunity Act which consolidates job training programmes

and aims to streamline services to assist job seekers. This reform involves concentrating

resources on programmes that have proved to be effective and become more responsive to

business needs.

ECONOMIC POLICY REFORMS 2016: GOING FOR GROWTH INTERIM REPORT © OECD 2016

LVA

RUS

BRA

COL

IDN

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Growth-friendly and efficient tax system supports productivity growth

Tax reforms that shifts the burden from direct taxation such as income tax to indirect

taxation such as VAT, Goods and Service tax (GST) or property taxation contributes to

productivity growth by reducing distortion on labour supply and corporate investments

(Arnold et al., 2012). The tax revenue in these countries relies considerably more on income

taxation and social security contributions compared to other OECD countries (Figure 1.17).

They have room to expand the role of indirect taxation, for instance, by harmonising the

sales tax rate across regions (e.g. in Canada) or introducing environmental taxes. The

efficiency of taxation can be also enhanced by broadening tax base and scrapping ill-

targeted tax expenditures, such as the deduction of mortgage interest for owner-occupied

housing from income taxation (e.g. in the United States).

Recent actions in this area include:

●

Australia introduced in its 2015-16 Budget several measures to reduce corporate taxation,

notably a lower rate of corporate-income for small businesses and a more generous capital

write-off rule.

Canada introduced some measures to reduce direct taxation, such as increasing the

annual contribution limit for Tax-Free Savings Accounts (TFSAs) and a gradual lowering

of the small business tax rate from 11% currently to 9% by 1 January 2019.

●

Figure 1.17.

The share of direct taxes in total tax revenues is relatively higher

Structure of general government tax revenue, percentage, 2014

Direct taxes

100

NOR

Goods and services

Property

Other taxes

100

GBR

JPN

USA

CHE

DEU

NLD

SVK

ESP

SVN

KOR

HUN

TUR

LUX

ISR

SWE

GRC

MEX

AUT

DNK

CAN

CZE

FRA

AUS

PRT

POL

EST

FIN

BEL

ITA

NZL

1. Direct taxes refer to an aggregate of taxes on income, profits and capital gains, social security contributions and taxes on payroll and

workforce. The last available year is 2013 for Australia, Japan, Mexico, the Netherlands and Poland.

Source:

OECD,

Revenue Statistics Database.

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Enhancing the effectiveness of public services and infrastructure

Providing effective public services in the face of mounting budgetary pressures while

containing tax increases is a challenge shared by many OECD countries, including those

from this group. An important reform priority is to enhance the cost efficiency of

healthcare while ensuring equity to access. Furthermore, in some countries such as

Australia and the United Kingdom, congested and depleted infrastructure calls for an

increased provision of infrastructure as well as regulatory reforms that enhance its

efficient use such as introduction of congestion fee.

ECONOMIC POLICY REFORMS 2016: GOING FOR GROWTH INTERIM REPORT © OECD 2016

CHL

IRL

ISL

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Table 1.5.

Reform priorities for countries with sluggish productivity growth

in spite of favourable institutional settings

AUS

Human capital

Early childhood education

Expand access to quality childcare and early education/

improve targeting

Primary and secondary education

Improve teaching quality/improve incentives for talented

teachers (especially to work in difficult schools)

Improve curricula and evaluation

Reduce inequality in educational outcomes

and opportunities

Tertiary education

Introduce/raise tuition fees flanked by income-contingent

loans/mean-tested grants, improve targeting

of means-tested financial assistance

Expand access/enrolment/reduce inequalities in access

Expand access to and effectiveness of apprenticeships

and VET and their relevance to labour market needs

Unemployment benefits/social protection and ALMPs

Strengthen resources for job-search assistance

and training while improving targeting of ALMPs

Tax system -structure and efficiency

Shift the tax burden from personal income taxes toward

consumption, immovable property and the environment

Shift the tax burden from corporate income taxes toward

consumption, immovable property and the environment

Broaden the tax base – reduce tax expenditures

Efficiency of public spending and services

Increase cost-efficiency in the healthcare sector

Reduce inequalities in access to public healthcare

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Reduce barriers to FDI and international trade

R&D and innovation

Increase and/or direct R&D support

Improve targeting of public support/evaluate

grant programs

Strengthen collaboration between research

centres/universities and industry

Provision and regulation of public infrastructure

Raise public and private investment in infrastructure,

promote private sector participation/concessions/PPPs

Introduce/increase/reform price signals/congestion

charges and user fees

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

CAN

NZL

CHE

GBR

USA

✓

•

✓

•

✓

•

1. R stands for recommendation in that area, A stands for any actions that are implemented or in the process

of implementation.

Some policy actions in these areas include:

●

The United States expanded the pilot project “Bundled Payments for Care Improvement

Initiative” conducted by Centers for Medicare and Medicaid Services to over 2000

additional hospitals and medical establishments.

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●

Australia is implementing its Infrastructure Growth Package which includes an initiative

encouraging State and Territory governments to privatise assets to finance new

investments.

The United Kingdom, in its Productivity Plan put forth in July 2015, prioritises the

upgrading of road network, to be achieved partly by spending GBP 15 billion on new roads

over the rest of this decade. It also sets as a target that superfast broadband be made

available to 95% of UK households and businesses by 2017.

●

Some reforms can increase the return to investment in knowledge-based capital

These countries are among those with relatively high rates of investment in

knowledge-based capital (KBC), a wide range of intangible assets that includes, beside R&D,

data, brand, design, firms-specific skills and quality managerial practices. While KBC is

observed to have contributed substantially to GDP growth in advanced OECD countries

(Corrado et al., 2012), KBC also generate knowledge spill-overs due to their non-exclusive

nature, thereby acting as an important source of productivity growth (OECD, 2013a).

Despite their high intensity in KBC investment, the subdued productivity growth suggests

that these countries are enjoying only limited return on their investment.

In order to strengthen the economy-wide impact of KBC investment, these countries

should encourage a stronger interaction between industries and research institutes, with a

view to improving the commercialisation of new technologies. Also, reducing entry barriers

and enhancing competition in industries (such as network and service industries) allows

innovative firms that leverage KBC to play a larger role as the driver of productivity growth

and the source of knowledge spill-overs. Similarly, reducing barriers to trade and FDI would

encourage foreign firms closer to the technological frontier to enter the domestic market,

facilitating the diffusion of new knowledge. However, limited policy actions have been

observed in those policy areas recently.

Group 6: Countries with relatively low productivity in non-manufacturing sectors,

fast population ageing and high barriers to female labour force participation

(Germany, Japan and Korea)

Countries in this group generally have a productivity level in services that is low

relative to the level in manufacturing, with the productivity gap being particularly large

compared to other countries (Figure 1.18). Lagging productivity in services is contributing

to economy-wide labour productivity being significantly below the average of the upper-

half of OECD countries (Germany being an exception) (Figure 1.19). Therefore, reducing

regulatory barriers to competition and innovation in network industries as well as

professional services and retail distribution remains a key common priority.

Another challenge shared by these countries is the rapid ageing of population. The

share of working-age population plus the older population under the age of 75 in those

countries will fall significantly faster than in other OECD countries (Figure 1.19). Given the

need to mitigate the impact of labour force shortages, boosting the full-time labour

participation of women has been high on the policy agenda of these countries. However,

this requires comprehensive reforms that not only remove institutional disincentives for

full-time labour participation but also that promote a working environment that can best

help to reconcile work and family responsibilities.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Figure 1.18.

The productivity in services sectors is low compared to manufacturing

Value-added per employee of business sector services,

manufacturing sector = 100, 2014

130

120

110

100

JPN

ISR

FIN

ESP

HUN

KOR

SVN

NOR

GBR

DNK

CHE

DEU

SVK

NLD

ITA

IRL

FRA

USA

CZE

SWE

AUS

POL

AUT

PRT

EST

BEL

130

120

110

100

1. Business sector services cover distributive trade, repair, accommodation, food and transport services; information and

communication; financial and insurance; professional, scientific and support activities. Data refer to 2013 for Belgium, Denmark,

France, Israel, Italy, Japan, Korea, Poland, Portugal, Slovak Republic, Spain, Switzerland, the United States; 2012 for Australia and the

United Kingdom. The observation on business sector services in Japan is an estimate based on National Accounts for 2013 and

the 2014 JIP Database. The data on manufacturing sector for Israel include mining and quarrying while the data on business sector

services include real estate activity.

Source: OECD National Accounts Database,

Cabinet Office (Japan) 2013 National Accounts, Central Bureau of Statistics (Israel) “Product,

Productivity Compensation of Employed Persons and Capital Return 2005-13”.

1 2

http://dx.doi.org/10.1787/888933323888

Figure 1.19.

A faster population ageing is expected compared to other OECD countries

Projection of the share of population aged 15-74 in total population, percentage

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

Germany

Japan

Korea

OECD

Source:

OECD,

Economic Outlook 96 Long-term Database.

1 2

http://dx.doi.org/10.1787/888933323895

Strengthening competition in non-manufacturing sector boosts productivity in services

and the competitiveness of the manufacturing sector

Regulatory barriers to entry and competition have held back productivity growth in

non-manufacturing sector by discouraging innovation and impeding efficient resource

allocation. Such regulatory barriers have also undermined the competitiveness of

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

downstream industries, especially manufacturing, given that 30% or more of the total

value added in exports of manufactured goods is created with services as intermediate

inputs. This indicates that substantial efficiency gains could be achieved in services

industries by easing regulatory barriers to entry, which could in turn help boosting

competitiveness of the manufacturing sector. To this end, those countries are

recommended to facilitating entry and competition in network industries and other

services, namely in retail. In Germany, abolishing price regulations and reducing exclusive

rights in professional services is also a priority. Recent policy actions in this area include:

●

Japan passed a law ensuring the neutrality of the electricity transmission and

distribution sectors with regard to generation and retail through legal unbundling. It also

passed a law that facilitates the establishment of foreign enterprises and promotes

entrepreneurship in the National Strategic Special Zones.

Korea reviewed nearly 800 regulations and amended the laws underpinning 2 377

regulations under the Regulatory Reform

Shinmungo,

a system allowing citizens to

request reform directly to the government. It also launched the “Regulatory Reform for

Foreign Investment.”

●

Duality in social protection and training opportunity constrains productivity growth

Stringent employment protection on regular workers lowers labour productivity by

impeding a smooth reallocation of labour resource (Bassanini et al., 2009). Furthermore,

the significant gap in employment protection and training opportunities between regular

and non-regular workers has a negative impact on income equality and human capital in

those countries, due to the limited mobility from non-regular to regular contracts. These

countries thus need to reduce labour market duality by increasing the transparency in

dismissal procedure of regular workers while strengthening the job protection and training

opportunities of non-regular workers.

While there are few reforms in the area of dismissal procedure of regular workers,

some steps have been taken to strengthen the social protection of non-regular workers: For

instance, Japan is to expand Employees’ Pension Insurance and has extended the coverage

of health insurance to 250 thousand non-regular workers beginning from 2016. Germany is

considering a reform that limits the duration of employment on jobs filled by temporary

work agency workers to 18 months. Those workers are to receive the same remuneration

as comparable regular workers after 9 months.

Multi-dimensional efforts are needed to increase full-time labour participation of

women

Full-time labour participation of women in these countries remains limited for various

reasons: fiscal disincentives such as the joint taxation system or benefits and allowances

conditional on spouse’s non-employment; high costs, insufficient supply or ill-targeted

childcare services; lack of flexibility in working-time arrangement and long working hours

that prevent the take up of maternity leave. Duality between regular and non-regular

workers also discourages labour participation, given that women are overrepresented in

part-time workers (which are mostly non-regular contracts) in these countries

(OECD, 2015e). Therefore, reforms to boost women’s full-time participation should extend

to multiple dimensions covering tax/benefits system, public services and labour

regulations, whereas increasing the supply of childcare facilities or maternity leave alone

may not be sufficient.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Table 1.6.

Reform priorities for countries with low productivity

in non-manufacturing sectors and high barriers to female labour participation

DEU

Reduce economy-wide regulatory burdens

Reduce administrative burden on start-ups/complexity of regulatory procedure

Other recommendations (strengthen the competition framework, reduce

the scope of public ownership)

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Retail trade and professional services

Reduce barriers to FDI and international trade

Reduce/reform public subsidies to agriculture

Job protection

Ease EPL on regular workers to narrow the gap with respect to non-regular

workers and tackle labour market duality

Ensure the enforcement of labour laws

Unemployment benefits/social protection and ALMPs

Expand the coverage of social protection and ALMPs to e.g. non-regular

workers

Expand/target job- placement schemes

Tax system – labour tax wedges

Remove tax and benefit disincentives to full-time female/second earners/lone

parents participation

Other recommendations (reduce labour tax wedge/disincentives to low income

earners’ full-time participation)

Tax system -structure and efficiency

Shift the tax burden from personal income taxes toward consumption,

immovable property and the environment

Shift the tax burden from corporate income taxes toward consumption,

immovable property and the environment

Broaden the tax base – reduce tax expenditures

Policy barriers to full-time female participation – other than taxes and benefits

Expand access to quality childcare and early education/improve targeting

Reform parental leave policies/work place arrangement

Human capital

Primary and secondary education (Ensure adequate school resources

and infrastructure, etc.)

Expand access to and effectiveness of apprenticeships and VET

and their relevance to labour market needs

Expand access to and effectiveness of lifelong/job-related education

and training

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

JPN

KOR

1. R stands for recommendation in that area, A stands for any actions that are implemented or in the process

of implementation.

Recent policy actions include:

●

Germany boosted federal expenditure to expand the childcare services supply for

children aged 0-3 years and to raise the quality of childcare, in particular with regards to

facilities and equipment. It also abolished the cash-for-care subsidy.

Japan is increasing the number of childcare places in order to accommodate about

0.5 million children by March 2018. Also, after-school childcare centres are being created

to provide care for 0.3 million children by March 2020.

●

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●

Korea introduced the provision of free childcare for up to 12 hours per day for all children

under five, regardless of the employment status of the mother and family income. Free

childcare will be prioritised toward families whose both parents work.

Group 7: Emerging-market economies with ample room for productivity catch-up

through investment in knowledge-based capital and better resource allocation

(Chile, Mexico, China and Russia)

Following several years (or decades in the case of China) of strong growth, these

emerging-market economies need to shift to new sources of growth to continue to catch up

with advanced economies. Productivity gains driven by resource reallocation away from

agriculture to manufacturing, capital deepening, integration into the global trade system

and the associated technology transfer have largely run their course. As the productivity

gap between those countries and advanced OECD countries remains large, those countries

need to step up investment in knowledge-based capital, improve resource allocation and

encourage a more widespread development of skills and human capital.

These economies benefited greatly from their high integration in global value chains

(GVCs) as suppliers of base materials (Chile and Russian Federation) or assemblers of final

products (China and Mexico) (Figure 1.20). However, except Russian Federation, their

manufacturing exports embody a relatively small share of domestic value-added arising

from services, where the value-added created by GVCs is often concentrated (OECD, 2013b).

To draw more value-added from their global engagement, these countries need to further

improve their capabilities in knowledge and skill-intensive activities within GVCs (such as

new product development, manufacturing of core components, or brand development).

Figure 1.20.

Strong participation into GVCs but considerable room

to move up the value chain

Index of GVC participation and the share of domestic service value-added

in manufacturing exports,

percentage, 2011

Backward participation in GVCs: Foreign VA embodied in exports, as % of total gross exports

Forward participation in GVCs: Domestic VA embodied in exports of foreign country, as % of total gross exports

Domestic services value added share of gross exports

SVK

CZE

KOR

HUN

SVN

FIN

POL

MEX

AUT

JPN

SWE

DEU

BEL

CHL

ISL

ITA

PRT

FRA

NOR

EST

CHE

ESP

TUR

ISR

CAN

GBR

IRL

USA

AUS

NLD

DNK

GRC

NZL

LUX

1. The index of GVC participation consists of Backward participation, which is the share of foreign value-added embodied in a country’s

exports, and Forward participation, which is a country’s value-added embodied in other countries’ exports, as the share of its exports.

Backward participation tends to be higher for small countries or those engaging heavily in assembly of final goods (ex: China, Mexico

and some central European countries). Forward participation tends to be higher for countries exporting natural resource and base

material (ex: Norway or Australia) and those participating in GVC as providers of core components (ex: the United States or Japan).

Source: OECD-WTO Trade in Value Added Database (TiVA),

October 2015.

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CHN

RUS

ZAF

IDN

LVA

IND

COL

BRA

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Table 1.7.

Reform priorities for countries with a large room

for productivity catch-up through investment in knowledge-based capital

and better resource allocation

CHL

R&D and innovation

Increase public support

Increase and/or reform indirect R&D support – tax incentives,

improve balance between direct and indirect support

Improve targeting of public support/evaluate grant programs

Strengthen collaboration between research centres/universities

and industry

Reduce economy-wide regulatory burdens

Reduce administrative burden on start-ups/complexity

of regulatory procedure

Strengthen the competition framework

Reduce the scope of public ownership/state intervention

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Reduce barriers to FDI and international trade

Legal infrastructure and the rule of law

Reinforce judiciary independence and accountability

Reduce the scope for public officials’ interference in decision-

making processes/corruption, increase business transparency

Financial markets regulation and supervision

Strike a better balance between liberalisation and regulation

in financial markets

Human capital

Early childhood education

Expand access to quality childcare and early education/improve

targeting

Primary and secondary education

Improve curricula and evaluation

Reduce inequality in educational outcomes and opportunities

Other recommendations (ensure adequate school resources

and infrastructure, etc.)

Tertiary education

Improve curricula and evaluation

Expand access/enrolment/reduce inequalities in access

Expand access to and effectiveness of apprenticeships

and VET and their relevance to labour market needs

Unemployment benefits/social protection and ALMPs

Expand the coverage or level of UB/social protection

and social services

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

MEX

CHN

RUS

1. R stands for recommendation in that area, A stands for any actions that are implemented or in the process

of implementation.

Effective innovation policies stimulate business investment in knowledge-based capital

In order for innovation to play a larger role in economic growth, business-based

investment in KBC must be stimulated through effective support measures and a strong

innovation system including better networking between research institutions and firms to

facilitate the commercialisation of new technologies. These countries are recommended to

revamp or reallocate their R&D support and enhance university-industry or public-private

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sector linkages. Increasing their stock of KBC conditions their ability to innovate and move

up the value chain, but also enhances their ability to absorb and assimilate the diffusion of

advanced technology from the global frontier.

As an example of recent actions in this area, Chile launched an agenda for productivity,

innovation and growth that includes the creation of a productivity commission, designed to

lay the ground work for more balanced and diversified development across sectors, and to

increase investment in R&D activities. Mexico launched the National Entrepreneur Fund to

foster productivity and innovation in small and medium sized enterprises.

Reforms that enhance resource allocation boost productivity and maximise

the economy-wide impact of KBC

Economy-wide productivity growth is shaped importantly by the extent to which more

productive firms can grow in size (Bartelsman et al., 2013). Also, reforms that strengthen an

economy’s ability to allocate resources to innovative firms magnify the impact of KBC

investment, for these firms can act as a larger source of knowledge spill-overs (OECD, 2015b).

By reducing further the scope of command and control regulations as well as the weight of

state ownership and entry barriers, these countries can better use market mechanisms that

reward competitive firms with larger market shares. Such reforms, together with those in

financial and labour markets to improve the allocation of skills and capital toward more

productive firms, would unleash productivity growth.

Recent policy actions in this area include:

●

Chile introduced a new competition bill that strengthens the sanctions for cartels,

introduces a more effective and transparent merger control regime and grants the

competition authority formal powers to perform market studies.

China lifted price controls on 24 commodities and services, including for some

categories of freight and passenger transport. It reduced the administrative burden by

abolishing or delegating to the sub-national level over 350 administrative approval

processes. Furthermore, with the removal of the ceiling on short-term deposits, interest

rates have been liberalised except for some policy rates.

Mexico is implementing the License and Production Sharing Contracts in energy sector

and has concluded three tenders. It is also opening up the insurance and telecom

industry to FDI. Furthermore, it launched a one-stop online shop for government

services and information that would reduce the administrative costs of start-ups.

●

A robust legal infrastructure is a foundation of economic growth, especially for

innovation-driven growth. A transparent and fair legal environment that ensures

protection of intellectual property and contract enforcement is crucial for investment in

KBC considering that new ideas can often be easily replicated, denying those who invested

in the development of such ideas the possibility to recoup their initial investment. Reforms

that combat corruption and enforce the rule of law would also stimulate entrepreneurship

by reducing the

de facto

entry barriers.

Recent policy actions in this area include:

●

China increased the transparency in business conduct by replacing the annual review of

enterprises by a requirement of annual disclosure of corporate reports to all enterprises.

Mexico passed its new anti-corruption framework and has accelerated the implementation

of a new justice system at state level.

●

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●

The Russian Federation enacted the amendments to the anti-corruption law that

broadened the categories of public officials forbidden to have foreign bank accounts.

Also, Judges’ salaries are to be increased by 30% in 2016.

Reforms enhancing educational outcome and labour mobility complement KBC

in realising higher productivity growth

An intensive use of new technologies or other types of KBC increases the demand for

workers with skills that complements KBC in achieving higher productivity. A shortage of

such skills can be a bottleneck for countries in this group in translating investment in

innovation into significant productivity gains. On the other hand, new technologies will

inevitably displace workers with skills that are substituted by new technologies. This

underscores the importance of education reforms that enable more students and workers

with ample opportunities to acquire relevant skills. To this end, those countries ought to

further raise the quality of primary and secondary education and ensure equity in access.

They are also need to re-orient tertiary education to the skills demanded in labour markets

and to upgrade VET by improving teaching quality and curriculum.

Recent policy actions include:

●

Chile is processing bills to reform early childhood education, pre-primary education and

improve teacher pay conditions. The government has also introduced new legislation

that eliminates profits, tuition fees, and selective admission practices in primary and

secondary schools receiving state subsidies.

Mexico implemented the new national standard for primary and secondary teacher

performance, in spite of delay in some states. It also launched the Educational Infrastructure

Certificates, a new bond to finance the improvement of school infrastructure.

●

Reforms that remove barriers to labour mobility, such as granting equal access to

public services by migrant workers irrespective of their registration status, also boost

productivity growth by making it easierfor skilled workers to relocate to higher

productivity jobs in urban areas (OECD, 2015e). To this end, China should allow equal

access to education for the children of all migrants. Steps are taken as few cities have

issued residential permits to migrants.

Group 8: Emerging-market economies with high labour informality

and infrastructure bottlenecks (Turkey, Brazil, Colombia, India, Indonesia

and South Africa)

The last group consists of emerging-market economies in need of addressing a wide

range of structural bottlenecks in order to sustain strong medium-term growth. The most

binding bottlenecks include high labour informality and youth unemployment, severe

shortages in public infrastructure and low educational attainment.

Various institutional barriers to formal employment must be removed

Labour informality is often associated with poor employment conditions such as a

lack of protection against wage non-payment or hazardous work, lay-offs without notice or

compensation, and the absence of benefits such as pensions, sick pay and health

insurance. Informal employment, especially prevailing in India, Indonesia and Colombia

(Figure 1.21), and high youth unemployment (especially serious in South Africa) are rooted

on various rigidities affecting the formal labour markets: onerous labour regulation and

stringent employment protection (e.g. in India and Indonesia); high minimum wage and

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Figure 1.21.

Informal employment represents a high share of total employment

Percentage of total employment, 2013

IND

IDN

COL

MEX

BRA

ZAF

CHN

TUR

1. Data refer to 2009 for Indonesia; 2010 for South Africa and China; 2012 for India. For China, the figure is an official estimate for urban area.

Source:

International Labour Organisation (ILO).

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non-wage hiring costs (e.g. in Colombia, Indonesia, Turkey and South Africa); and stringent

regulatory entry barriers and administrative burden that impede entrepreneurship and job

creation (e.g. in South Africa). In Turkey, the low statutory retirement age is discouraging

formal work at older ages.

The scope of reforms to reduce labour informality and unemployment in those

countries is wide, given the need to address both the high costs of formal employment and

weak job creation. Essential reforms include shifting worker protection from jobs to

workers by reducing the rigidities in severance procedures while introducing or expanding

the coverage of unemployment benefits; cutting social security contributions and other

non-tax compulsory employer payments; capping increases in minimum wages and

weakening administrative extension of collective bargaining; cutting red tape and the

administrative burden on business operations and strengthening active labour market

policies such as job placement services.

Recent policy actions in those areas include:

●

India amended its Apprentices Act, relaxing some rigid norms related to the hiring of

apprentices. Also, the firm size threshold below which companies can lay off employees

without prior government approval has been raised in some states. Furthermore, a

unified online portal for 16 central government labour laws was launched while making

labour inspection processes more transparent.

Turkey has granted permanent social security contribution cuts and wage subsidies for

the employment of young workers. The wages of workers receiving on-the-job

vocational training will be paid by the government for six months, and the employer

social security contributions for these workers will be fully subsidised for 3�½ years, if the

training ends up in hiring.

In order to reduce the barriers to entrepreneurship, South Africa lowered turnover taxes

for micro businesses and increased tax credits for the venture capital scheme.

●

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Addressing infrastructure bottlenecks through efficient regulatory settings

and better targeting

The large infrastructure gap that constrains productivity growth in these countries

should be addressed by crowding in private investments for instance, in the form of

private-public partnerships. Essential reforms in this area include resolving the

inefficiencies in regulation concerning tender, concession, land acquisition or project

approval as recommended to India and Indonesia. Also, a better prioritisation of

investment through an ex-ante cost-benefit evaluation (as recommended to Colombia)

would enhance the contribution of infrastructure investment to productivity growth.

Recent policy actions in this area include:

●

Brazil launched the second stage of the Logistics Investment Programme PLI, with

planned investments of BRL 70 billion through concessions by 2018.

Colombia expanded the incentives to coordinate better regional infrastructure projects,

namely prioritising larger regional projects in need. The plan also included general

guidelines for evaluating and prioritising PPPs with a methodology to be issued by the

National Planning Department.

As part of the “Make in India” initiative, India took measures that could encourage

private investment, such as relaxing FDI regulations in some sectors including railways,

construction, air transport services. It also introduced regulatory reforms in the energy

sector such as an enhanced transparency in coal allocation, a partial privatisation of

Coal India and the auctioning of oil and gas fields.

●

Raising educational attainment by allocating more resource and improving

teaching quality

As regards the performance of teenage students, the results from the PISA tests reveal

the poor international ranking of these countries, in particular in maths (Figure 1.15). This

undermines productivity growth but in some cases also contributes to high youth

unemployment (e.g. South Africa). There is considerable scope for increasing the resources

devoted to education (on a per student basis) and to improve the quality of teachers

through more comprehensive training and evaluation programmes. Furthermore,

vocational training must be revamped both in supply and quality in order to address the

low youth employability and skill shortage.

Recent policy actions include:

●

Columbia increased new fellowships for tertiary education and introduced a new system

of targeting student loans. It also foresees extending early childhood care to 1.1 million

infants as opposed to 400 thousand today.

Turkey adopted its Vocational and Technical Education Strategy and Action Plan 2014-18

which includes 24 specific goals to be monitored by performance indicators, including

revisions of curricula according to national professional standards.

Indonesia introduced a new syllabus while increasing the funding for education.

India launched the Skill India Initiative that includes expansion in quantity and scope of

skill training programmes and financial incentives for youth attending and completing

those programmes.

●

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Table 1.8.

Reform priorities for countries with high labour informality

and infrastructure

TUR

Job protection

Ease EPL on regular workers (reduce severance payment)

to narrow the gap with respect to non-regular workers

and tackle labour market duality

Ease conditions for justified individual or collective dismissals

Minimum wages and wage bargaining systems

Reduce the minimum cost of labour/allow for age

or sector differentiation

Unemployment benefits/social protection and ALMPs

Expand the coverage or level of UB/social protection

and social services

Tax system – labour tax wedges

Reduce average/marginal labour tax wedges

Reduce labour tax wedges by reducing social security

contributions

Human capital

Primary and secondary education

Ensure adequate school resources and infrastructure

Improve teaching quality/improve incentives for talented

teachers (especially to work in difficult schools)

Improve school accountability and autonomy

Reduce inequality in educational outcomes and opportunities

Other recommendations (improve curricula and evaluation,

reduce dropout)

Tertiary education

Increase university autonomy and accountability

or specialisation by institutions

Improve targeting of means-tested financial assistance

Expand access to and effectiveness of apprenticeships

and VET and their relevance to labour market needs

Expand access to and effectiveness of lifelong/job-related

education and training

Reduce economy-wide regulatory burdens

Reduce administrative burden on start-ups/complexity

of regulatory procedure

Ease business exit/bankruptcy procedures

Other recommendations (Strengthen the competition

framework etc.)

Reduce sector-specific regulatory burdens

Network sectors (energy, transport, telecoms)

Reduce barriers to FDI and international trade

Provision and regulation of public infrastructure

Raise/improve targeting of public and private investment

in infrastructure

Promote private sector participation/concessions/PPPs

Financial markets regulation and supervision

Encourage private participation in financial markets/

gradually reduce state intervention while ensuring strong

prudential regulation

Reduce/reform public subsidies to agriculture and energy

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

•

✓

BRA

COL

IND

IDN

ZAF

✓

•

✓

•

1. R stands for recommendation in that area, A stands for any actions that are implemented or in the process

of implementation.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Cross-country policy issues with implications for international trade and FDI

Global trade growth has slowed and, compared to past trends, is particularly weak

relative to GDP growth, which may reflect a structural shift in the relationship between the

two aggregates (OECD, 2015f, Constantinescu et al., 2015). Yet, trade plays a fundamental

role in the diffusion of technology and access to high-quality imported intermediate goods

boosts productivity and competitiveness within GVCs (OECD, 2013b). Therefore, collective

efforts to remove structural impediments to international trade, such as non-tariff

barriers, are required to boost growth both in the short and in the longer term.

Some progress is observed at the global level, and to a lesser extent, at the regional and

country levels. At the global level, the negotiation on the Trade Facilitation Agreement

(TFA), which contains various provisions for improving the speed and efficiency of border

procedures, was concluded in December 2013, followed by the adoption of a Protocol of

Amendment in November 2014.The full implementation of the TFA is expected to reduce

worldwide trade costs by 12.5 to 17.5% (OECD, 2015g). Furthermore, some important

aspects of trade facilitation such as the availability of advanced rulings or streamlining of

border and custom procedures strengthen significantly countries’ integration into GVCs

via increased use of foreign inputs in exported goods or higher exports of intermediate

goods used as inputs in foreign exports (Moïsé and Sorescu, 2015).

Another breakthrough came in October 2015, when 12 Asia-Pacific countries reached

the Trans-Pacific Partnership (TPP) agreement which covers nearly 40% of the world

economy. Aside from the reduction of tariff barriers, the TPP agreement includes

provisions that improve intellectual property protection, remove barriers to investment in

services, and increase consistency and transparency of regulatory regimes across partner

countries. While the immediate impact of the agreement on trade and FDI flows remains

uncertain given that many tariffs are abolished only gradually, the prospect of better access

to foreign markets may stimulate investment in the relatively short run. In the medium

term, stronger competition and increased inward and outward investment are likely to

stimulate innovation and productivity growth in previously shielded sectors, namely

services and parts of agriculture (Jorgensen et al., 2015).

At the regional level, the European Commission has taken a step toward the Digital

Single Market by adopting a strategy that lays out legislative process toward further

harmonisation in regulations and reduction of administrative burdens concerning cross-

border e-commerce and telecom markets. Another strategy related to the Energy Union

was also adopted, aiming for a fully integrated European energy market that involves

interconnections and a common regulatory framework. While tremendous efforts are

required to push through regulatory harmonisation in Europe, the return to such reforms

is large, involving substantial boost in trade and FDI across EU countries (Fournier

et al., 2015). The harmonisation in service sector is of particular importance, given that it

accounts for up to half of the value-added embodied in gross exports. The stringency of

regulatory barriers to service trade reduces not only imports but also exports of services,

for such restrictions are mainly behind the border and therefore weakens the

competitiveness of local firms as well (Nordås and Rouzet, 2015).

At the country level, some reforms in the highly protected agriculture sector and

energy subsidies have taken place. For instance, Japan has reformed its Agricultural Co-

operative system and relaxed some of the limits on corporate farm ownership, steps that

may promote competition and boost productivity. Norway raised production-level caps in

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

some agriculture support mechanisms so as to encourage a shift to larger-scale units.

Indonesia scrapped subsidies on gasoline and capped those on diesel – a welcome move

that contributes both to the efficiency of budget allocation and the environment. However,

the administrative price setting regime that replaced subsidies is cumbersome and still

inhibits the adjustment of domestic fuel prices to world prices. Furthermore, Indonesia

sharply increased import tariffs on food, clothes, cars and other consumer goods, which

pushes-up inflation and has a negative impact on household income.

Summing-up: a great variation in the implementation of reforms across

and within country groups

During 2015, the highest share of full implementation of structural reforms

corresponding to the recommendations made in

Going for Growth 2015

has been observed in

country group 1 consisting mostly of Southern European countries (Figure 1.22). Among the

countries in this group, Italy and Spain have been most active, while the intensive pace of

reforms observed in Greece in previous years basically came to a halt in 2015 in part due to

the political transition in the first half of the year. Despite a slower share of completed

reforms, other country groups could also end-up with a pace of reforms that is comparable

to the average observed across OECD countries over the past two years, if preliminary steps

in a number of areas are fully implemented. Within each country group, some countries have

been more active, for instance Norway (group 3), France (group 4) and Japan (group 6). In the

case of the two country groups comprising emerging-market economies (groups 7 and 8),

relatively few reforms have been fully implemented but initial action has been taken on a

substantial number of recommendations, in particular in China, India and Mexico.

Figure 1.22.

A large variance in the share of the

Going for Growth

recommendations

implemented or in process of implementation

Percentage

Limited steps taken or no action

100

Group 1

Group 2

Group 3

In process of implementation

Fully implemented (adoption of relevant law etc.)

100

Group 4

Group 5

Group 6

Group 7

Group 8

1. The chart summarises the share of recommendations made in

Going for Growth 2015

by the status of their implementation at the end

of 2015. Full implementation refers to legislation of relevant laws or equivalent measures.

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OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

The implications of growth-enhancing structural reforms for inclusive growth

and macroeconomic rebalancing

This section briefly discusses the potential impact of

Going for Growth

recommendations

and actions taken on policy objectives other than growth in GDP per capita agenda, more

specifically the narrowing of income distribution as well as of fiscal and current account

imbalances.

Many structural reforms yield double dividends in term of boosting growth

and reducing income inequality

The fact that in many countries growth in GDP per capita over the past three decades

has benefitted little low-income households points to the importance of structural reforms

that promote inclusive growth. The contribution of structural policies to trends in income

inequality has been well documented (see

inter alia

OECD, 2008, 2011, 2014c, 2015h), providing

many insights on how reforms could be tailored so as to yield the double dividend of higher

growth and reduced income inequality (see Chapter 2 of

Going for Growth 2015).

Many of the recommendations made in the 2015 issue of

Going for Growth

are expected

to reduce income inequality, especially those aimed at increasing employment (Table 1.9,

column 1). However, some reforms encouraging the labour participation of low income

earners and low-skilled workers can lead to higher wage dispersion at the lower end of the

distribution. Other reforms enhancing competition and innovation are often found to be

associated with wider earning gaps (OECD, 2011), partly through their role in stimulating

skilled-biased technology changes. This underscores the importance that such reforms be

complemented with measures to facilitate worker’s up-skilling and reduce skill mismatch,

such as better provisions of vocational trainings and lifelong learning programmes.

Across the ten OECD countries facing the highest degree of income inequality, the

number of reforms implemented or in the process of being implemented that are likely to

reduce inequality is twice as high as those that are more likely to increase them

(Figure 1.25).

The short-run budgetary pressures can be mitigated by a good design and packaging

of reforms

In many OECD countries, not least those with a very high level of government debt

relative to GDP, the need to pursue public finance consolidation remains high, especially

those where population ageing is likely to put additional budgetary pressures. Under a

stylised scenario of interest rates normalisation and a rising expenditure on healthcare,

long-term care and pension, government debt ratios are expected to rise in about two-third

of OECD countries even in the case where interest rates remain at par with GDP growth

rates from 2020 onward (OECD, 2015a). And the debt dynamic gets worse in the case where

interest rates exceed GDP growth (Figure 1.23).

Although

Going for Growth

recommendations generally contribute to fiscal

consolidation in the long run – in particular those that boost private-sector employment

(OECD, 2013c) – some of them are associated with non-negligible up-front increases in

public expenditure (or declines in revenues) and their implementation can thus pose

challenge to fiscal consolidation in the short run (Table 1.9, column 2). Countries with very

limited budgetary room may have to focus on low-cost measures or ensure that others are

financed through means that are as friendly as possible to employment and growth. The

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Table 1.9.

The implication of the

Going for Growth

recommendations

and actions taken on other objectives

Income

distribution

Labour market policies

Reducing the duality between regular and non-regular

workers (in job protection, training opportunity, etc.)/

reducing informal labour participation

Reforming minimum wage and wage bargaining

Extending the coverage of unemployment insurance

and social protection

Reducing the replacement rate and duration

of unemployment benefits/strengthening

conditionality on job-search

Improving effectiveness of ALMPs (job-search

assistance/individual follow-up/training

and re-skilling)

Reforming the tax-benefits system to encourage

labour force participation of the low-skilled

Reducing barriers to female labour force participation

(increasing provision of childcare, reducing fiscal

disincentives)

Reducing disincentive for continued work at old age

and tightening the eligibility to disability benefits

R&D and Innovation

Boosting innovation activities

(R&D and other investments in KBC)

Education/Human capital

Increasing the provision and quality of early,

primar and secondary education

AUS, BRA, CHE,

CHL,

CHN,

COL, CZE, DEU,

DNK,

FRA,

GBR, GRC, HUN, IRL, ISL,

IND, IDN, ISR,

ITA, JPN,

KOR,

MEX, NZL, NOR,

POL,PRT, SVK,

SWE,

TUR,

USA,

ZAF

AUT, BRA,

CAN,CHE,

CHL,

CHN, COL, CZE, DEU,

DNK,

ESP,EST,

FIN,

FRA,

GBR, GRC, HUN,

IND,

ITA, JPN, KOR,NZL,

POL,

PRT,

SVK,

SVN, SWE,

TUR, USA,

ZAF

AUT, BEL, BRA, CAN,

CHL, CHN,

CZE, DEU,

DNK,

ESP,

EST, FIN,

FRA,

GRC, HUN,

IND, IDN, IRL,

ISR, ITA, JPN, KOR,

LUX,

LVA, MEX,

NZL,

NOR,

POL,

PRT,

RUS, SVK, SVN, TUR, ZAF

CHE,

IDN, ISR, JPN,

KOR,

NOR,

TUR, USA

AUS,

AUT, BEL,

CAN, CHE,

COL, CZE, DNK, DEU,

EST,

FIN, FRA,

ITA, JPN,

KOR, LVA, POL, SWE

AUS, AUT,

BRA,

CAN, CHE, COL, DEU, DNK, EST,

FIN, FRA, GRC, ITA, JPN,

LVA,

NLD,

NOR,

SWE,

TUR, USA

AUS, BRA, COL,

EST,

GBR, IDN, IND,

LVA, MEX,

POL

AUS, CAN,

CHL,

COL,

CZE,

EST, IRL, LVA,

MEX,

NZL, PRT, RUS,

SVK,

SVN

CHL, DEU, ESP,

FRA, ITA, IND,

IDN, ISR,

JPN,

KOR,

LUX, NLD,

SWE,TUR

BEL,COL, ESP, IDN, PRT,SVN, TUR, ZAF

AUS, CHL,

CHN, GRC, IDN,

ITA, JPN,

KOR, PRT,

RUS,TUR

BEL,

FIN, FRA, IRL, LUX, NLD, PRT, SVN

Budget

balance

Current

account

position

Countries with priorities in this area

(countries

taking related action in bold)

-/~

ESP, EST, FRA,

GRC,

GBR,

IRL,

ISR, ITA,

LVA,

NLD, PRT,RUS, SVK, USA,

ZAF

AUT, BEL,

COL, CZE, DEU,

EST,

FIN,

FRA, GBR,

HUN,

IRL,

ISR, ITA,

LUX, LVA,

NLD,

POL, SVN,

SWE,

TUR

AUS,

CHE,

CHL,

COL,

CZE, DEU, GBR, IRL, JPN,

KOR,

NLD, NZL,

POL,SVK,

TUR, USA

AUT, BEL,

DNK, EST,

FIN,

HUN,

LUX,

NLD,

NOR,POL,

SVN, SWE, TUR,

USA

+/~

-/~

Increasing the outcome of tertiary education/broadening

access to VET and life-long training

Product Market Reform

Reforming product market regulation (PMR)

to enhance competition, trade and FDI

Reducing agricultural and energy subsidy

Tax reform

Shifting the burden from direct to indirect taxation

(including fiscal devaluations, etc.)

Enhancing the efficiency of tax system

(cutting back tax expenditure, broadening tax base,

fighting tax evasion)

Infrastructure

Increasing investment in public infrastructure

-/~

+/~

Note:

The table summarises the expected short- to medium-run impact of each type of reform in attaining the policy

objectives. “+” corresponds to the case where the reform is likely to contribute to the objective whereas “-

”corresponds to the case where it is unlikely to help or generate a short-run trade-off. “~” corresponds to the case

where the impact is ambiguous due to opposing effects. Blank corresponds to the case of no direct effects. The

country code in bold corresponds to the case where policy action is taken.

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short-run impacts on fiscal expenditure can be also mitigated by implementing in tandem

reforms that enable fiscal savings. An example of such “packaging” is a strengthening of

conditionality of unemployment benefits on activation measures while expanding ALMPs,

as is being done in Italy. Furthermore, some reforms can be implemented in a cost-efficient

manner through adequate regulatory reforms. For instance, enabling competition and

adequate pricing in network sector can stimulate private investment in public

infrastructure.

Figure 1.23.

Government debt levels will likely rise in a majority of OECD countries

with normalisation of interest rates and population ageing

Debt level in 2014 and simulated debt levels in 2030,

as a percentage of GDP

350

300

250

200

150

100

Debt level in 2014

Debt level in 2030 when the interest rate equals the GDP growth rate

Debt level in 2030 when the interest rate exceeds the GDP growth rate

350

300

250

200

150

100

SVN

NLD

GBR

SVK

FIN

DEU

CAN

HUN

USA

ESP

ISR

BEL

KOR

AUS

CHE

SWE

CZE

DNK

AUT

FRA

LUX

EST

1. The chart compares the government debt level in 2014 and the simulated level in 2030 under two alternative scenarios on the

evolution of the interest rate and the GDP growth rate. See the source for the details of assumptions made in the simulation.

Source:

OECD (2015),

OECD Economic Outlook,

OECD Publishing, Paris.

1 2

http://dx.doi.org/10.1787/888933323931

Among the ten OECD countries with the largest primary deficits and the highest

government debt levels, the majority of reforms implemented or in the process of

implementation are likely to put short-term pressures on the budgetary balance

(Figure 1.25).

Reforms can help rebalancing the structural component of current account deficits

or surplus

While current account imbalances declined substantially after the crisis, about one

half of the decline is explained by cyclical factors, namely large contractions in domestic

demand on the back of bursting housing bubbles in a number of deficit countries (Ollivaud

and Schwellnus, 2013). The narrowing of cyclically-adjusted global current account

imbalances reflects a substantial narrowing for all major trading areas except the euro

area, where the cyclically-adjusted balance of surplus countries continued to widen while

that of deficit countries narrowed by about one percentage point (Figure 1.24).This

underscores the importance of removing the institutional distortions that alter

households’ saving behaviour or return to private investment. For deficit countries,

reforms in labour and product markets that reduce labour or business costs may also help

to reduce imbalances by improving competitiveness.

EA15

PRT

POL

JPN

NZL

ITA

ISL

IRL

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

Figure 1.24.

The non-cyclical component of external imbalances remain substantial

Business and housing-cycle adjusted components of current account balances, as a percentage of GDP

Non-cyclical component

Business and housing cycle component

Headline current account

A. United States

-1

-2

-3

-4

-5

-6

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-7

-1

-2

-3

-4

-5

2000

2001

2002

2003

B. Euro deficit countries

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

C. Japan

-1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-1

-2

2000

2001

2002

D. Euro surplus countries

2003

2004

2005

2006

2007

2008

2009

2010

2011

E. China

-1

-2

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-2

-4

2000

2001

2002

2003

2004

2005

F. Oil zone

2006

2007

2008

2009

2010

2011

1. The chart decomposes the headline current account imbalances to the component explained by business and housing cycle and the

non-cyclical component. Following Ollivaud and Schwellnus (2013), the euro area surplus countries are defined to include euro area

members for which the current account surplus was on average larger than 1% of GDP over the period 2000-05 (Austria, Belgium,

Germany, Finland, Luxembourg and the Netherlands). The euro area deficit zone includes the remaining members of the OECD euro

area (France, Estonia, Greece, Ireland, Italy, Portugal, the Slovak Republic, Slovenia and Spain).

Source:

Updated calculations based on P. Ollivaud and C. Schwellnus (2013), "The Post-crisis Narrowing of International Imbalances:

Cyclical or Durable?” OECD

Economics Department Working Papers,

No. 1062, OECD Publishing, Paris.

1 2

http://dx.doi.org/10.1787/888933323943

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2014

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The expected contribution of structural reforms to a stronger current account

summarised in the third column of Table 1.9 suggests that reducing the minimum costs of

labour by reforming worker’s bargaining power help deficit countries to rebalance the non-

cyclical component of imbalances. Similarly, cutting back subsidies or tax incentives that

lead to excessive consumption or investment in specific products may also help. For

countries with a large current account surplus, regulatory reforms and fiscal supports that

boost investment in physical and knowledge-based capital as well as higher investment in

public infrastructure can contribute to reducing the structural component of the current

account. Furthermore, promoting the full-time labour force participation of women and

older workers may also work towards rebalancing by increasing income of those groups

and thereby reducing the need for precautionary or retirement saving.

Figure 1.25.

The actions taken are likely to help reduce inequality

but not macroeconomic imbalances

Number of

Going for Growth

recommendations implemented or in process of implementation

Reforms that contribute to objectives

Reducing income inequality

Fiscal consolidation

Current account rebalancing

Reforms that do not contribute

1. The chart summarises the number of recommendations implemented or in the process of implementation by the group of countries

facing highest income inequality, fiscal and external imbalances. See footnotes in the text for the methodology for selecting those

countries.

1 2

http://dx.doi.org/10.1787/888933323951

Across countries facing largest external imbalances, there are similar numbers of

reforms that have been implemented or are in process of implementation that are likely or

unlikely to help reducing those imbalances in the short run (Figure 1.25).

However, while

the reforms undertaken by countries with largest external surpluses are overall likely to

help the rebalancing, none of those undertaken by countries with largest deficits are

expected to contribute to the narrowing of imbalances.

Notes

1. This may be particularly the case when the indicator is compiled and averaged over a relatively

small group of countries such as the group of emerging-market economies.

2. The TFA will enter into force once two-thirds of members have completed their domestic

ratification process of the Protocol. Some of the largest trading countries such as the United States,

European Union and its member states, China and Japan have completed the ratification process.

3. The implication on the environment are not covered in this chapter, given that there are only very

few reforms that directly affects environment and that such impacts are importantly shaped by

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1. OVERVIEW OF STRUCTURAL REFORMS IN THE POLICY AREAS IDENTIFIED AS PRIORITIES FOR GROWTH

the environmental regulations in place (see Chapter 3 of the 2015 issue of

Going for Growth

for an

in-depth discussion).

4. The 10 OECD countries with highest income inequality are chosen on a basis of an index that

combines the standardised values of Gini coefficients and relative poverty rate. They are: Mexico,

Chile, Turkey, the United States, Israel, Japan, Greece, Spain, Australia and Portugal.

5. The 10 OECD countries with the largest fiscal imbalance are chosen on basis of an index that

combines the standardised value of cyclically-adjusted primary balance deficits (percentage of

potential GDP) and of government debt (percentage of GDP). They are: Japan, the United Kingdom,

the United States, France, Canada, Ireland, Belgium, Slovenia, Spain and the Netherlands.

6. The group of countries with the largest external imbalances are the 10 countries selected on the

basis of an index that combines the standardised value of current account deficits (averaged over

2010-14) and external debt (both as percentage of GDP) and the 10 countries with the largest

current account surplus. The largest deficit countries are: Greece, Turkey, Portugal, Poland,

New Zealand, Australia, Spain, Latvia, Colombia and the Slovak Republic, while the largest surplus

countries are: Norway, Switzerland, the Netherlands, Sweden, Germany, Denmark, Luxembourg,

Korea, Russian Federation and Slovenia.

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Economic Policy Reforms 2016

Going for Growth Interim Report

Chapter 2

Reform priorities

in a difficult macro context

This chapter reviews the main issues related to the short-term impact of structural

reforms in different macroeconomic contexts and takes stock of existing theoretical

and empirical studies. Taking reforms introduced in “normal” times as a

benchmark, it reviews the available evidence on the impact of reforms that are

implemented in “bad” times – i.e. in the presence of a sizeable negative output gap

and persistently weak demand – as well as under different assumptions regarding

the availability or effectiveness of macroeconomic policies in supporting the reforms.

In doing so the chapter focuses on the key channels through which different reforms

influence short-term activity via the main components of demand and discusses

how these channels operate under different macro conditions.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities.

The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem

and Israeli settlements in the West Bank under the terms of international law.

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2. REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

Reform priorities in a difficult macro context

Main Findings

●

In a context of weak demand, structural reform strategies should put more weight on

measures that in addition to stimulating medium-term employment and productivity

can best support demand in the short term. The reforms most likely to achieve this

include:

❖

Shift in the composition of public spending towards investment:

More specifically, public

infrastructure investment that effectively increases the growth potential in the

medium term (e.g. high-speed broadband network) can stimulate private investment

in the short term.

❖

Product market reforms in specific service sectors:

Reforming rules restricting the entry of

new suppliers (exclusive rights) and the capacity of existing suppliers to compete (fees

control) in services characterised by relatively low entry costs (e.g. professional services,

taxis, etc.) can yield positive short-term gains in employment and domestic demand.

❖

Reforms of benefit entitlements in the areas of pension or health:

Reforming pension or

health systems to contain future ageing-related costs can create the space for short-

term stimulus measures and raise their effectiveness, notably through increased

confidence in the sustainability of public finances. The gains from such reforms can

exceed the cost in the short term to the extent that only future benefits are reduced.

❖

Reforms easing frictions in the reallocation of resources:

Reducing barriers to geographic or

jobs mobility can increase the speed of employment gains in difficult times. Housing

market policies that promote residential mobility include the lowering of transaction

taxes or costs on buying properties as well as the reduction of the stringency of rental

regulation.

●

In contrast, the risks that reforms fail to lift activity in the short run – or that they even

further depress demand – are highest in the case of reforms that initially put downward

pressures on wages or mark-ups, such as reforms of employment protection legislation,

minimum wages or product market regulation in network industries. A number of

measures could help mitigate those risks:

❖

Reform packaging:

Simultaneous reforms of labour and product markets may reduce

the risk or extent of contractionary effects. First, the price reduction resulting from

product market reforms will ease the downward pressure on the real wage from labour

market reforms. Second, labour market reforms will facilitate the necessary

reallocation of workers arising from product market reforms as rents are redistributed

across firms and sectors.

❖

Reform synchronisation:

In the case of the euro area, a greater synchronisation of

reforms will also help reduce the transition costs by giving greater scope to monetary

policy to mitigate the potential rise in real interest rates.

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REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

●

Increasing the short-term payoff from structural reforms also calls for measures that

shift the relative strength of the transmission channels from supply-side reforms to

demand components.

❖

Addressing financial sector dysfunctions to improve the credit flow:

Significant progress has

been achieved in cleaning the banking sector balance sheet following the crisis.

However, the share of non-performing loans in the banking system remains relatively

high in a number of euro area countries. In fact, the relative speed at which banks’

balance sheets were consolidated in the United States may have helped support the

faster recovery.

❖

Reducing policy uncertainty:

Reform strategies that are well communicated and

sufficiently comprehensive to create synergies may also provide clearer guidance and

confidence about the direction and sustainability of policy decisions.

Introduction

Quantifying the long-term gains from structural reforms with some degree of

precision is not straightforward but there is at least broad consensus on the direction of

impact and the main channels of transmission. Assessing the short-term effects is more

challenging: not only are the various channels of influence more difficult to disentangle

but the macro context in which the reforms are introduced raises ambiguity as to the

direction of the impact.

Progress has been made in better understanding how reforms of product and labour

markets affect the main components of supply and demand in the short term and hence

how they impact on output gaps, external accounts and relative prices.

While a further

understanding of the short-run dynamic effects of reforms is still needed, it is particularly

so in the case where reforms are introduced in a context of persistently weak demand,

deflationary pressures, sizeable negative output gaps, and with only a partial support from

demand-management policies. One concern is that some reforms may have a short-term

contractionary effect on activity, prices or employment.

For instance, such concern has been raised and debated in the context of reforms

introduced at a time when monetary policy is constrained due to nominal interest

rates hitting the zero lower bound (Eggertson, Ferrero and Raffo, 2014; Fernández-

Villaverde, 2014; Vogel, 2014). More generally, the experience of southern euro area

countries, which have implemented significant reforms in a context of aenemic domestic

and external demand as well as without the support of macro policies, has led to renewed

interest in better understanding the links between reforms and demand and raised

questions about the timing, sequencing and packaging of reforms.

Against this background, this chapter reviews the main issues related to the short-

term impact of structural reforms in different macroeconomic contexts and takes stock of

existing theoretical and empirical studies. An effort is made to assess the extent of

knowledge about the short-term demand effect of specific structural reforms. This impact

can have a huge bearing on political feasibility, as transitional losses are likely to erode

popular support for reforms.

To set the scene, the next section lays out the case of reforms introduced in “normal”

times, i.e. with the economy operating close to potential and with available support of

macroeconomic policies. It identifies the main channels through which structural reforms

influence short-term activity through consumption, investment and net exports. The

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2. REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

subsequent section then focuses on the case where reforms are introduced in “bad” times,

i.e. with a sizeable negative output gap and persistently weak demand, and examines how

the more adverse environment influences the relative strengths of the main channels. The

final section goes one step further and considers cases where reforms are implemented in

a weak conjuncture and under constrained macro policies.

Structural reforms in normal times

The speed at which gains from structural reforms can be achieved depends on several

factors, even in normal times, that is when cyclical factors are not at play. First, the

credibility of announced reform packages plays a key role. Households and firms are more

likely to act early in response to reforms if they believe in the implementation and the

sustainability of the policy measures as a permanent change. Second, structural

characteristics of the economy, including the structural policy settings in place will shape

the speed at which a reform yields benefits. For instance, stronger price or wage stickiness

is likely to delay the long-term benefit of reform,

ceteris paribus,

by constraining the scope

and speed of real variables to adjust to the policy change. Third, well-functioning financial

markets play a key role in bringing forward the gains from reforms by funding the

necessary investment and allowing for income smoothing both in anticipation of future

gains and to offset temporarily income loses (OECD, 2012).

Mainstream models predict a number of channels of transmission through which

structural reforms affect the main components of demand. The key channels include

wealth

permanent income

effects which bring forward future reform-driven income

gains in current consumption and investment, notably through rising asset prices and

positive confidence channels, ii)

disposable income and cash-flow effects

for households and

firms that are liquidity or cash-flow constrained, i.e. that do not have access to borrowing

from banks or other financial institutions iii)

uncertainty or negative confidence

effects arising

from households’ and firms’ perception of heightened (or diminished) income and profit

insecurity, which come through the precautionary motive for saving and iv) a

real interest

rate channel

which captures inter-temporal substitution effects: by making the holding of

financial assets more attractive, a rise in the real interest rate induces a decline in current

consumption in favour of higher savings. In addition, some reforms have budgetary

implications when not introduced in a budget-neutral way and will affect demand

through a fiscal multiplier effect. In what follows, the discussion considers mainly

budget-neutral reforms.

What does the evidence tell us about the short-run impact of reforms

in normal times?

A more detailed analysis of the impact of different types of reforms on short-term

demand and activity through these channels is reported in Appendix 2.1. This analysis

essentially comes from studies that simulate the impact of reforms, in particular based on

dynamic stochastic general equilibrium (DSGE) models. There are also a few empirical

studies looking at changes in policy indicators to define structural reform episodes and to

estimate their short-term effects (Bouis et al., 2012). In any case, the empirical literature

looking at the short-term effect of reforms mostly refer to normal times, that is when

macro policies can react to short-term demand developments. Therefore, when macro

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stimulus is not available, demand effects are likely to be stronger than in normal times

after a reform. The main results from model-based and empirical analysis can be

summarised as follows:

●

Reforms of wage bargaining institutions, minimum wages and employment protection

legislation generally increase wage flexibility and can improve competitiveness through

downward pressures on labour costs.

❖

Model-based analysis of this class of reforms generally indicate positive, albeit

moderate, short-term impacts on consumption and output (Cacciatore, Duval and

Fiori, 2012; Barkbu et al., 2012). One study shows that in the case of reform to

employment protection legislation, the lower firing costs may lead to an increase in

unemployment and a reduction in demand in the initial year after the reform but this

effect is quickly reversed in subsequent years (Cacciatore, Duval and Fiori, 2012).

❖

In contrast, the evidence from reduced-form empirical analysis points to the absence

of significant positive impacts on demand from reforms to employment protection

legislation or wage bargaining in the first few years (Bouis et al., 2012).

●

Reforms of the tax and transfer systems, including the tax structure, unemployment

benefits and pension systems can boost both employment in general and the labour

force participation of specific groups:

❖

The evidence from reduced-form analysis indicates that reducing the share of direct

taxes in overall tax revenue is found to quickly reduce unemployment, particularly for

youth, to boost female and youth participation and private investment growth (Bouis

et al., 2012). A special case of a growth-enhancing tax reform for countries in a

monetary union is the so-called fiscal devaluation, which typically takes the form of a

reduction in employer’s social security contributions combined with an increase in the

value-added tax rate. Empirical evidence points to a positive, but short-lived effect, on

employment and net exports, with long-term GDP gains reflecting essentially

productivity improvements (Johansson et al., 2008; Koske, 2013).

❖

The evidence from both model-based simulations (e.g. Cacciatore, Duval and

Fiori, 2012) and reduced-form estimates (Bouis et al., 2012) suggests that lowering

unemployment benefits in normal conditions yields positive gains in consumption

and overall demand within 2-3 years. In most studies, reforms of unemployment

benefits are found to have a significantly stronger positive short-term impact on

demand and output than reforms to wage bargaining and employment protection

legislation.

❖

Model-based evidence indicates that an increase in retirement age is most likely to

have a positive effect on demand in the short run via lower private saving due to life-

cycle motives (Karam et al., 2010; Barrell et al., 2009). This is corroborated by reduced-

form analysis, which shows a positive impact on consumption, investment and GDP

(Bouis et al., 2012).

❖

The evidence on the impact of pension reforms is less clear in the cases of benefit

reductions or increases in contribution rates as their effect is similar to a fiscal

contraction, albeit a deferred one. They are found to stimulate private saving in the

short run, but may also boost investment through anticipation of reduced public debt

(Karam et al., 2010).

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●

Measures to improve job-search assistance and training for the unemployed or childcare

services can raise labour force participation and address labour market frictions.

However, these typically have implications for public spending and should be carefully

assessed on a budget-neutral basis to capture the effects coming from the structural

changes:

❖

In the case of a budgetary-neutral reform of active labour market policies (ALMPs), the

effect is found to be similar to that of a tightening of unemployment benefits

(Cacciatore, Duval and Fiori, 2012), except that by lowering firms’ search costs or the

costs of initial training, they may stimulate labour demand somewhat more rapidly.

●

Product market reforms comprise essentially reductions in regulatory barriers to

competition which can lead to lower mark-ups and export prices, lower input prices (and

production costs) for downstream industries, and higher productivity through efficiency

gains and improved product quality and variety through higher investment in

innovation.

❖

By and large, model-based evidence points to modest short-term GDP gains from

product market reforms, with more visible impacts appearing after 2-3 years

(Anderson et al., 2014); (Barkbu et al., 2012).

❖

Evidence from reduced-form empirical analysis based on aggregate data shows no

significant short-term impact on GDP, except for a decline in the initial year, due to a

temporary drop in investment (Bouis et. al., 2012). Evidence based on sector-level data

indicates that productivity gains can be achieved after 2-3 years (Bourlès et al., 2013;

Dabla-Norris et al., 2015).

❖

The overall results at the aggregate level may mask very different outcomes depending

on whether barriers to competition are lowered in manufacturing or service sectors,

and within services whether the reforms affect primarily network industries

(e.g. energy, telecoms and transport) or professional services, where regulatory

barriers to entry and strict conduct regulation may create strong latent demand.

Overall, the bulk of evidence suggests that the gains from pro-growth structural

reforms introduced in normal times generally exceed the potential losses even in the short

run. This is generally the case including with reforms aimed at restoring competitiveness

through lower relative production costs and prices. However, the positive effect is in many

cases modest, especially in the three-year horizon. The aggregate benefits from reforms to

unemployment benefits or pension systems (retirement age) tend to accrue more rapidly

than those from other types of reforms, in particular the ones primarily focused on raising

wage flexibility and facilitating resource reallocation. Furthermore, the modest net effect

of reforms often masks more substantial shifts in the composition of demand, not only

between domestic and foreign, but also within domestic demand, reflecting the opposite

impact that reforms have on investment and consumption in the case of some reforms.

Initial conditions and reform implementation play a role

The short-term effects of structural reform in one area may depend in part on initial

policy and institutional settings in other areas. However, the evidence is inconclusive to the

extent that it is difficult to empirically identify how interactions between policy settings

and reforms affect outcomes (e.g. Bassanini and Duval, 2009; Bouis et al., 2012). For

instance, model-based simulations by Cacciatore et al. (2012) find that gains in the

aftermath of product market reforms would be quicker if initially job protection is less

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stringent and unemployment benefits are low. That is because when entry barriers fall,

new jobs are filled more quickly, minimising the risks of lengthy unemployment spells for

laid-off workers. On the other hand, findings from reduced-form empirical analysis show

that under initially weak job protection a relaxation of product market regulation leads to

higher unemployment and lower employment (Bouis et al., 2012).

How reform is implemented also matters as there can be material interaction effects

between policies:

●

Reform packages:

a package of labour and product market reforms that is sufficiently

broad can induce a faster adjustment and alleviate the transitional costs of certain

reforms (Anderson Hunt and Snudden, 2014; Cacciatore et al., 2012; Everaert and

Schule, 2008, Gomes et al., 2013). For instance, (Cacciatore et al., 2012) find that a

combination of product market, job protection and unemployment benefit reforms

boosts GDP, employment and wages immediately, in contrast with the effects of some of

these reforms taken in isolation.

Reform credibility:

Early announcement and credible commitment to future reforms can

help bring forward the gains from reforms by fostering investment and consumption

today. Adjémian et al., (2007) find that announcing product market reforms in advance

can trigger an immediate response by firms, accelerating the upside adjustment in

investment and output even before the reform is actually implemented.

Pace of reforms:

theoretical studies suggest that outcomes might be better if reforms were

sequenced, with product market reforms preceding labour market reforms (Blanchard

and Giavazzi, 2003). Reforming product markets first can also lower the resistance to

labour market reforms by reducing rents and facilitate their subsequent

implementation. Another political argument for gradualism is that as governments have

a fixed amount of political capital, it is best if they allocate their scarce resources to one

set of reforms at a time (Coeuré, 2014). However, too long a time lag between reforms

might not be desirable. For instance, in the case of New Zealand’s reforms in the 1980s a

significant time lag (about five years) between the liberalisation of product markets and

labour market reforms mitigated the potential overall gains from reforms (Caldera

Sánchez, de Serres and Yashiro, 2016).

Boldness of reforms:

Recent empirical analysis has found that incremental labour market

reforms tend to raise household income instability while bolder reforms do not,

increasing the risk of resistance and reversal in the former case (Cournède et al., 2015).

●

Structural reforms under weak demand conditions

The previous section has shown that the short-term impact of reforms on the main

components of demand often depends on the net outcomes of conflicting channels. The

short-term impact from many types of reforms depends notably on the net effect on

disposable income and cash-flow as well as the relative strength of the wealth effect versus

the precautionary motive for savings. While the bulk of evidence indicates that positive

channels dominate the negative ones in normal times, it may no longer be true when

reforms are introduced at an unfavourable stage in the business cycle.

Several factors shift the relative strengths of these channels in downturns. First, the

proportion of households and firms facing liquidity constraints can be expected to rise

along with unemployment and the tightening of credit conditions, which are often features

of downturns (Bernanke and Gertler, 1989; Fissel and Jappelli, 1990). Second, even for

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households or firms that are not liquidity-constrained, the positive wealth effect of

reforms is likely to be weaker, especially if the downturn is associated with dysfunctions in

financial markets or the need for private-sector deleveraging. Conversely, the

precautionary motive for saving in the face of reforms is likely to be higher in a bad

conjuncture. Heightened macro-economic and policy uncertainty can lead households and

firms to postpone spending and investment “to wait and see”. Finally, the efficiency of job

matching may deteriorate in periods of persistent unemployment, given a rising share of

long-term unemployed and declines in housing prices. Some of these factors may also

condition the effectiveness of fiscal and monetary policies in supporting demand.

Reforms reducing the cost of labour and mark-ups are more likely to depress demand

during downturns

Reforms entailing a bigger risk of further depressing demand in downturns include

those whose most immediate impact is to put downward pressures on wages or mark-ups.

●

Product market reforms that enhance competition in formerly protected sectors usually

lead to incumbents to engage in restructuring as they seek efficiency gains to preserve

mark-ups in the face of downward pressures on prices. In turn, this leads to the

displacement of workers and capital in the short run (Blanchard, 2006). Stronger

competition also leads to the exit of least productive firms. In normal economic

conditions, displaced resources are absorbed eventually by new entrants, more

competitive firms that are expanding production or by other sectors. As a result of more

efficient resource allocation, aggregate productivity increases and as lower prices

stimulate demand employment is also expected to increase. However, when the

economy is in a slump, demand may respond less to the lower prices resulting from

competition. In such context, displaced resources are expected to remain unemployed

for longer as a bleaker profit outlook and credit constraints slows the entry of new firms

or the expansion of incumbent firms (Lee and Mukoyama, 2015; Barlevy, 2003; EC, 2013).

Reforms of wage bargaining institutions or the minimum wage have an uncertain effect

on demand in the short term during a downturn. The downward pressures on wages

may not be as rapidly compensated by employment gains and the prospects of future

productivity-related income gains as they would in normal times. This will weaken

consumer demand in the short term by lowering disposable income and strengthening

precautionary savings. An easing of employment protection legislation may lead to a

similar outcome, as the outflow from unemployment may take more time to exceed the

rise in the inflow rate than in normal times.

Reforms that drive wages down and increase product market competition can boost

competitiveness and net exports but their ultimate impact on aggregate demand may be

muted in an environment of weak external demand, such as a global downturn.

Conversely, Canada, Germany and Sweden have in the past introduced major reforms in

a context of weak domestic demand but benefited from robust global trade growth

helping to revive their economies relatively quickly (Caldera Sánchez, de Serres and

Yashiro, 2016).

●

Reforms raising incentives to take-up work may be contractionary during downturns

Reforms reducing the generosity of unemployment benefits (replacement rate and

duration) are effective in reducing unemployment in the short run by encouraging the

unemployed to intensify job search and accept existing offers, thereby increasing outflows

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from unemployment. However, when labour demand is weak reducing unemployment

insurance could lower disposable income if no jobs are available in the short run,

negatively impacting demand. Indeed, evidence shows that when unemployment benefit

reforms are undertaken during a typical economic upturn employment increases after two

or three years (Figure 2.1). In contrast, if it is undertaken during a typical downturn, the

gain in employment is muted and even turns negative from the third year after the reform.

Figure 2.1.

The gains in employment of an unemployment benefit reform

can turn negative during a downturn

Percentage points

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Economic downturn¹

Years after the shock

1. The lower (upper) line corresponds to the impact of the reduction in the initial unemployment benefit replacement rate during

economic downturn (upturn), where the economic cycle is measured through the level of the pre-reform unemployment gap (i.e. the

difference between the structural unemployment rate and the unemployment rate). The economic downturn (upturn) corresponds to

the case where the unemployment gap is set to the minimum (maximum) value within the sample.

Source:

Bouis et al. (2012).

1 2

http://dx.doi.org/10.1787/888933323963

3.0

2.5

2.0

Economic upturn¹

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Other reforms aimed at increasing labour supply are also likely to be less effective in

boosting employment and may even be contractionary when labour demand is weak. For

instance, tax reforms to remove the fiscal disincentives to second earner’s labour

participation (such as reduction of spousal tax credits) or reforms that tighten access to

disability benefits may not increase employment much if implemented in a context of

weak demand, given that the targeted groups may face even more difficulties in finding

work than the other unemployed. Instead, they may lower private consumption by

reducing household disposable income, if the measure is introduced also to generate

budgetary savings.

Indeed, one factor contributing to the higher risk of a negative impact of reforms is the

potential increase in skills and geographical mismatches, combined with the heightened

pressures on resources devoted to job-search assistance and training programmes. Even

though evidence on mismatches is not always easy to interpret, increasing mismatches are

a recurrent concern during cyclical downturns insofar as the impact differs across

industries and regions (OECD, 2011). In such a case, a depressed housing market may slow

geographical mobility, in particular where mobility is already hampered by housing and

rental market policies that create high transaction costs (Andrews et al., 2011). Also, active

labour market policies that focus on the least employable workers may be less effective in

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downturns. Reinforcing job-search assistance may not help in this case as the probability

of reemployment does not depend so much on search efforts when there is a lack of jobs

(Boeri et al., 2015). Hence, there may be a case for shifting the focus on workers early in the

unemployment spells as the chances to find a job are higher.

Demand-side policies mitigate a negative impact from reforms in the short run when

demand is weak

The short-term effect of reforms in downturns and the extent to which adverse effects

can be quickly over-turned also depends on the timeliness and effectiveness of macro

policies. As regards, monetary policy, its effectiveness in stimulating aggregate demand in

the short run will in part depend on how well the financial market is functioning and on

the share of liquidity constrained households and firms. A dysfunctional financial sector

makes it harder for funds to flow to new investment opportunities, which is critical for

reforms to pay off. On the other hand, a higher share of liquidity constrained agents may

make monetary policy more effective by reducing the cost of debt services, leaving the net

effect unclear.

The effectiveness of fiscal policy may be enhanced during recessions due to higher

multiplier effects (Auerbach and Gorodnichenko, 2013; Blanchard and Leigh, 2013). During

a recession government spending is less likely to cause an increase in the interest rate and

crowd out private consumption and investment, provided long-term fiscal sustainability is

not at risk. Similarly, the increase in the proportion of liquidity-constrained firms and

households who have a higher propensity to consume out of their income makes fiscal

policy more effective during a downturn (Galí et al., 2007), especially during a financial

crisis or when the financial sector is weak (Corsetti et al., 2012).

The largest short-run impact on aggregate demand is likely to come from government

spending measures rather than from tax cuts (e.g. Mineshima et al., 2014). This is largely

because spending measures have a direct impact on aggregate demand while tax

reductions will have a muted effect if they are saved because of, for instance, high

uncertainty. In practice, fiscal stimulus measures can be designed on both the spending

and tax side to have a rapid and substantial multiplier effect.

Among spending measures, public investment is usually found to be the most powerful

instrument (Röhn, 2010). Boosting investment in public infrastructure is a typical way to

boost demand during a downturn, as it pulls demand today, as opposed to other investments

(e.g. R&D or education) that need longer to pay off. An increase in public infrastructure

investment boosts aggregate demand via two channels, first, through the short-term fiscal

multiplier, and second, by crowding in private investment. Indeed, evidence suggests that

the positive short-term effect on demand is even stronger when there is economic slack –

less crowding out of private investment –, and monetary policy is accommodative

IMF (2014). Furthermore, the productivity gains from infrastructure shocks are significantly

higher during downturns (Dabla-Norris et al., 2015). In the European Union, removing

financial barriers and harmonising regulations, in particular in the area of network

industries, would help achieve a higher return on investment.

Some tax reductions can also be put in place to increase household disposable income

and boost spending in the short term. While in theory consumption should not respond much

to temporary changes in taxes, as consumers are likely to spread out their consumption

over their lifetimes, evidence suggests that in some cases temporary tax reductions can be

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effective in boosting consumption spending in the short term. For instance, the income tax

rebates the US federal government enacted in 2001 and 2008 as part of its economic

stimulus packages significantly boosted spending in the short term, especially for

households with low liquid wealth or low income (Johnson et al., 2006; Parker

et al., 2013).

Reductions in labour taxes or social security contributions targeted to lower-

income workers, can also increase aggregate demand in the short term, as spending by this

group is closely tied to their disposable income (De Mooij and Keen, 2013).

The scope for expansionary fiscal policy may, however, be limited when long-run fiscal

constraints are significant. An increase in government spending (or tax cuts) in countries

with high debt levels may act as a signal that fiscal tightening will be required in the near

future. The anticipation of such adjustment could have a contractionary effect – through

for instance adverse effects on financial markets, interest rates and consumer spending –

that would offset the short-term expansionary effects. Ricardian behaviour, implying that

fiscal stimulus is at least partly offset through an increase in private sector savings, is

stronger the higher the level of government debt (Röhn, 2010). Moreover, in a financial

crisis, debt financed spending expansions might reinforce a negative feedback loop

between bank and government balance sheets when government debt is high.

Structural reforms under weak demand and constrained macroeconomic policies

Monetary and fiscal policies may be limited in various ways in practice, making it

difficult to smooth the transitional dynamics associated with structural reforms. This

section discusses the short-run impacts of structural reforms when weak demand

is compounded by three types of constraints: monetary policy has hit the zero lower

bound and has to rely on unconventional monetary tools; participation in a monetary

union; and fiscal policy is constrained by consolidation requirements or legislated bounds

on the fiscal deficit.

Reforms at the Zero Lower Bound (ZLB)

The zero lower bound (ZLB) brings an additional channel through which structural

reforms may lower demand and output in the short run, namely an increase in the real

interest rate. In principle, structural reforms that boost aggregate supply can, in a weak

demand environment, have a negative impact in the short run by putting downward

pressures on prices and inflation expectations if the monetary policy stimulus cannot

be increased. The inability of the monetary authority to adjust nominal interest

rates in response to falling expectations would push up the real interest rate, further

depressing rather than stimulating aggregate demand (Eggertsson et al., 2014; Fernández-

Villaverde, 2014).

In practice, this may be an issue only for a relatively limited set of reforms, mostly

those that enhance competitiveness through downward pressures on domestic production

costs and mark-ups. In the case of reforms that boost productivity through innovation and

the reallocation of resources, it is less clear how much of an increase in production

capacity can be achieved in the presence of anaemic demand, given the more limited

incentives to make the necessary investments. Even if firms do invest, given the time

required for these investments to translate into higher supply and downward pressures on

inflation expectations, economies may have moved away from the ZLB, hence allowing

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monetary policy to react by lowering nominal interest rates. In any case, structural reforms

that raise future potential growth will also increase the natural real interest rate, thereby

reducing the stringency of the ZLB.

Furthermore, other factors will contribute to mitigate the potential adverse real

interest rate effect, even in the case of reforms that do result in rising real interest rates.

First, liquidity-constrained households will not be very sensitive to the real interest rate

increases but will benefit from falling price levels (Vogel, 2014). Second, insofar as the

reforms yield competitiveness gains, increases in net exports will help mitigate the

downward pressures on domestic demand, although this may not be sufficient to offset the

impact of higher real interest rates (Eggertsson et al., 2014). Third, reforms leading to a

price level adjustment need not create disinflationary expectations if the change is bold

and implemented in a short time period rather than incremental and introduced gradually

(Coeuré, 2014).

Finally, in a country with its own currency, the presumption that monetary policy is

incapable of responding to a deflationary shock at the ZLB is debatable given the now

widespread use of unconventional monetary policies and their effectiveness in boosting

demand up to a point. However, there is concern that unconventional tools could be

insufficient in a context of falling real neutral interest rates and persistent negative output

gaps, raising the risk of a downward spiral in output and inflation. In such a context, it is

priori

unclear whether structural reforms would reduce the risks by raising the long-term

real neutral rate or increase the risks by temporary increasing deflationary pressures. Such

concerns are of particular importance in countries that do not have their own monetary

policy, where cost-cutting structural reforms should be considered with particular

attention and be part of wider policy packages.

Reforms in a monetary union

The real interest rate channel that plays a role at the zero lower bound also operates

in a monetary union, even in normal times. With nominal rates set at the union-wide level,

reforms undertaken by one member alone to reduce relative wages and prices could lead

to a higher real interest rate. In such a case, internal devaluations can be contractionary in

the short term, especially during a period of weak demand, as the positive gains on

competitiveness and growth through a reduction in labour costs and domestic prices can

be outweighed by the negative effects from higher real interest rates.

Furthermore, for

countries in a monetary union, changes in the real exchange rate must come through

adjustments in relative labour costs and prices. In the case of reforms that lead to a real

exchange rate depreciation, such adjustment can be costly. This is especially the case

when inflation in the union as a whole is near zero, as real depreciation would require

reductions in nominal wages and prices.

On the other hand, fiscal devaluations – a reduction of employer’s social security

contributions combined with an increase in value-added (VAT) tax rate – is a type of measure

that may have more traction for countries in a monetary union, in particular as a means to

boost competitiveness and exports in the short run. As mentioned above, a fiscal devaluation

is a special case of a reform that shifts taxation from more distortive (direct) sources to less

distortive (indirect) ones. Such shifts have been found to yield permanent gains in output

and productivity levels in the longer run. An additional competitiveness channel operates in

the short term in the case of a monetary union, as long as not too many members introduce

a similar reform at the same time, in which case the impact on net exports of each is

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diminished. With nominal wages fixed in the short run, a reduction in social security

contributions rates lowers labour costs. If the fall in labour costs is passed on into prices,

both export and domestic good prices fall leading to a boost in competitiveness. By contrast,

the higher VAT only bears on domestic and import goods, but not on exports and, therefore

will not dampen the positive effect on competitiveness and net exports.

The magnitude of the short-run benefits of a fiscal devaluation is, however, uncertain.

Model-based simulations suggest that fiscal devaluations have beneficial, but moderate,

short-term effects on net exports, output and employment (Koske, 2013). For instance, for

Portugal, a fiscal devaluation of 1% of GDP would lift net exports by 0.1% of GDP in the first

year of the reform (EC, 2011). By contrast, econometric estimates for the euro area show

much larger effects in the short run, of an immediate impact on net exports of up to 4% of

GDP for a 1% GDP shift in revenues (De Mooij and Keen, 2013). Given the uncertainty

surrounding the short-term benefits, a fiscal devaluation cannot thus be a substitute for

more fundamental reforms of labour and product markets to sustainably boost

competitiveness, but can help sustain demand in the short term.

Reforms under budgetary constraints and public finance consolidation

An expansionary fiscal policy can compensate the lack of support from monetary

policy in addressing the demand shortfall, especially for euro area countries which cannot

expect an expansionary monetary policy by the ECB to accommodate their individual

reforms. However, the fiscal space in many OECD countries has been limited either

because they have to engage in fiscal consolidation, face high debt financing costs or their

fiscal balances are bound by rules. Indeed, for several countries needing to put public

finances on a sustainable path, fiscal policy has been contractionary until recently.

Negative impacts of fiscal consolidation are likely to be more pronounced during weak

demand times as fiscal multipliers are significantly larger during economic recessions

than expansions (Auerbach and Gorodnichenko, 2013).

Tight fiscal conditions and a limited ability of the government to cushion the

transitory costs for losers may increase some of the contractionary effects of structural

reforms in the short run (Duval, 2008). For instance, reforms that increase flexibility in

employment protection and wage formation can negatively impact private consumption if

governments cannot mitigate the increase in income risks with an expansion of

unemployment benefits or active labour market policies (ALMPs). Fiscal constraints are

particularly a concern if they undermine the ability of countries to carry out structural

reforms that entail higher spending (e.g. in ALPMs, R&D or childcare), less revenue

(e.g. labour taxes), or up-front public spending, for instance through transfer schemes, to

compensate reform losers. Furthermore, they can also reduce the feasibility of growth-

enhancing structural policies that could enhance short-term as well as long-term growth,

such as high-quality infrastructure investment.

The urgency in the fiscal situation may bias structural reforms toward those that

realise fiscal savings rapidly, but may be contractionary in the short run. An example of

such reforms is a reduction in welfare expenditure that for example took place in

New Zealand in the early 1990s amid the strong need for fiscal consolidation (Caldera

Sánchez, de Serres and Yashiro, 2016). While a strong pressure to reduce public spending

may facilitate the implementation of reforms to public-sector administration and services,

the success of the reforms in terms of raising cost-effectiveness and quality may be

undermined if priority needs to be given to immediate budgetary savings.

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Reforms likely to boost short-run demand when demand is weak and macroeconomic

policies are constrained.

Some reforms can be expansionary even under relatively weak demand and

constrained macroeconomic policies if they encourage investment or generate rapid

job gains:

●

Product market reforms that ease supply constraints.

Reducing entry barriers in service

sectors with large pent-up demand and low entry costs can unleash the entry of new

firms, boosting investment and job creation relatively fast. Simulations for Italy show

that half of the gains of reforms that facilitate the entry of new firms in the service sector

would be realised within three years (Forni et al., 2010). Case studies have also found

that liberalisation in sectors such as retail trade and telecommunications often resulted

in fast decreases in prices and increases in output and employment (Bertrand and

Kramarz, 2002; Faini et al., 2006; Skuterud, 2005). Another example is professional

services that remain heavily regulated in many countries (i.e. legal, accounting,

engineering and architecture professions), especially as regards entry regulations

(Figure 2.2). As such reforms reduce the relative price of non-tradables, their impact on

net exports will be similar to that of an internal devaluation, with additional positive

effects due to the fact that non-tradables are a major input into tradables.

Reforms that improve confidence or reduce uncertainty regarding future economic conditions:

improving the sustainability of public finances, credible reforms in pensions and

healthcare systems can boost consumption today through wealth effects and reduced

need for precautionary saving. Empirical studies have, indeed, shown that the risk of

unexpected healthcare expenditure is an important motive of precautionary saving, and

policies that improve access to medical insurance increase consumption (Gruber and

Yelowitz, 1999; Jappelli et al., 2007; Bai and Wu, 2014). However, such reforms may be less

effective in reducing precautionary saving if the volatility of income and the risk of

unemployment is very high (Mody et al., 2012). Product market reforms that reduce the

economy-wide administrative burdens on firms and reduce the initial cost of starting-up

a business can also improve expectations on future business conditions. For instance,

simulations suggest that reforms to reduce the initial costs of starting-up a business

implemented during the crisis in Italy, Portugal and Spain have significantly raised the

birth rate of firms in those countries (Ciriaci, 2014).

●

Overall, the review of the evidence on the effects that specific reforms can have on

demand when introduced in a difficult macro context allows for a tentative hierarchy of

reforms to be drawn based on their likely effectiveness (Table 2.1). The measures most

likely to bring short-term benefits even in a bad conjuncture are those aimed at raising

investment in knowledge-based capital, including through infrastructure spending and tax

structure reforms, as well as those focusing on helping unemployed workers to find jobs,

including through higher mobility. In fact, the effectiveness of these measures even tends

to be stronger in a difficult context than in normal times. In the specific case of the euro

area, one reform that is likely to pay-off in a bad conjuncture is the shift in the tax

composition from direct to indirect sources.

Other reforms may have effects that do not necessarily differ much when introduced

in a context of weak demand as compared to a normal conjuncture, which means in most

cases modest short-term benefits. These include measures to raise competition in

professional services sectors or to increase the retirement age. On the other hand, an

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REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

easing of employment protection on regular contracts or reforms of collective wage

bargaining arrangements are more likely to entail short-term costs if introduced in a

difficult context. The same is true for reforms of pension systems, if they involve

reductions in benefits or increases in contributions.

Figure 2.2.

Regulation in professional services

Index scale of 0-6 from least to most restrictive

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Entry

Conduct

Entry

Conduct

Entry

Conduct

Entry

Conduct

Entry

Conduct

Entry

Conduct

Entry

Conduct

Entry

Conduct

USA¹

Weaker

Equal

Stronger in EMU

Weaker

Stronger

Equal

Stronger

5.0

2013

2003

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Entry

0.0

BEL

CAN

FRA

DEU

ITA

JPN

NLD

ESP

SWE

CHE

GBR

1. 2008 data instead of 2013.

Source:

OECD,

Product Market Regulation Database.

1 2

http://dx.doi.org/10.1787/888933323978

Table 2.1.

Expected short-term effects of specific reforms on demand

Effect on demand

in normal times (1)

Change in effect relative

to (1) due to downturns

but with support

from macro policies (2)

Weaker

Equal

Weaker

Stronger

Equal

Weaker

Stronger

Change in effect relative

to (2) due to constrained

macro policies (3)

Reduction in regulatory barriers to competition in network industries

Reduction in regulatory barriers to entry in professional services

and retail trade

Shift in tax composition from direct to indirect sources

Reform of collective wage bargaining arrangement and minimum wages

Easing of employment protection legislation on regular contracts

Reform of unemployment benefits

Strengthening of job search assistance, training and wage subsidy programmes

Reforms of pension systems: Increasing retirement ages

Reforms of pension systems: Reducing benefits or raising contributions

Raising incentives for investment in knowledge-based capital, including

through infrastructure spending

Increase

Small increase

No effect or small decrease

Increase

No effect or small decrease

Increase

Notes

1. A large number of studies looking at the short-term effect of structural reforms using either a

model-based or reduced-form empirical analysis are reported in Appendix 2.1. More complete

information, including the review of case studies, can be found in Caldera Sánchez, de Serres and

Yashiro (2016).

2. The latter owes to the fact that while the destruction of jobs is immediate, job creation tends to be

gradual as time is needed to match firms and available workers.

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3. Model-based simulations indicate that unfunded increases in spending on active labour market

policies or childcare services have stronger positive effects on demand within the first two years

than after five years (Barkbu et al.; 2012).

4. Insofar as competition for jobs is fiercer in weaker labour markets, active labour market

programmes that focus on some workers may improve the search ability of those workers by

reducing the relative job-search success of others (Crépon et al. 2013; Michaillat, 2012). A meta-

analysis of impact estimates of studies of active labour market programmes by Card, Kluve and

Weber (2015) suggests that they are more likely to show positive impacts in a recession.

5. Evidence by Fournier (2015) finds that lower heterogeneity in product market regulations between

two countries leads to greater bilateral FDI.

6. The Economic Growth and Tax Relief Reconciliation Act of 2001 gave tax rebates to most US

households over a ten-week period from late July to the end of September 2001. The Economic

Stimulus Act of 2008 consisted primarily of a USD 100 billion programme of tax rebates to

approximately 130 million US tax filers.

7. Indeed, using model-based simulations, a number of studies have found that the short-run

negative impact of product and labour market reforms can be fairly small (or non-existent) and

short-lived (only one year after reforms) (Gomes, 2014; Vogel, 2014).

8. In the case where private sector debt deleveraging is a major factor contributing to the weakness

of demand, it has been shown that under the presence of collateral constraints and long-term debt

contracts product market reforms may have a positive impact on output and employment even in

the short run despite their deflationary effect (Andrés, Arce and Thomas, 2014). However, the

effect of labour market reforms in the same circumstances are less favourable.

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2. REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

APPENDIX 2.1

Detailed analysis on the impact of reforms

in normal times

This appendix provides a summary of the expected effects of specific reforms on

short-term activity and a review of the findings from selected studies. The information is

reported in the table below, which describes some of the channels through which reforms

affect the main components of demand and reports the results obtained from DSGE-type

model-based analyses and empirical analyses. The specific reforms considered in the

overview are the following:

Labour market reforms to enhance wage flexibility and facilitate labour resource reallocation:

They include reforms of

wage-bargaining institutions

to raise the responsiveness of wage

adjustments to local labour market conditions; reductions in

minimum wages

to improve

the jobs prospect of low-skilled workers; reforms of

employment protection legislation

again to facilitate relative wage adjustments as well as the reallocation of resources across

firms and industries; By and large, they can also be thought of as measures to boost

competitiveness through downward pressures on domestic production costs, in particular

labour costs.

Reforms to stimulate labour force participation and improve matching:

This covers

essentially

reforms of the transfer systems,

including

unemployment benefits

and other

forms of income support for non-working individuals, but also measures to reduce the

financial disincentive to labour force participation of specific groups such as women

(including childcare support) and older workers (pension

systems).

Also covered are

measures to increase the scope and effectiveness of

active labour market policies,

particular job-search assistance and training programmes.

Reforms to boost product market competition:

This comprises essentially

reductions in

regulatory barriers to competition

which operates through state control of business

operations, various legal and administrative barriers to start-ups, protection of incumbents

as well as via obstacles to foreign trade and investment.

Reforms aimed directly at enhancing the productive capacity and productivity of the business

sector:

These cover

tax structure reforms

that encourage corporate activity, financial

incentives for business innovation and investment in public infrastructure.

Model-based assessments

The model-based simulations covered in the table are taken from studies that make

use of Dynamic Stochastic General Equilibrium (DSGE) models for the analysis of specific

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REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

reforms. In particular, many studies have been conducted by international organisations

on the basis of their core DSGE models.

●

European Central Bank:

Studies based on the Euro Area and Global Economy model

(EAGLE) include ECB (2015)

[1]

and Gomes et al. (2013)

[2].

European Commission:

Studies based on different versions of the QUEST model include

EC (2013)

[3];

Vogel (2014)

[4],

Varga and in’t Veld (2014)

[5],

Varga, Roeger and in’t

Veld (2013)

[6]

and Arpaia et al.,(2007)

[7].

IMF:

Studies based on the Global Integrated Monetary and Fiscal model (GIMF) include

Anderson et al.,(2014),

[8]

Barkbu et al., (2012)

[9],

Everaert and Schule (2008)

[10],

Karam

et al., (2010)

[11].

OECD:

Studies using a DSGE-type model include Cacciatore, Duval and Fiori (2012)

[12]

and Mourougane and Vogel (2008)

[13].

●

The DSGE approach has the advantage of describing the response of the macro-

economy to reforms within a consistent general equilibrium framework and to illustrate

the transmission channels. DSGE model-based simulations also allow for assessing issues

that are relevant today, but have little historical precedent, such as the zero lower bound on

nominal interest rates in many advanced economies.

A direct comparison of model-based results across studies requires caution given that

the same structural reform can be captured in different ways depending on the

characteristics of the model. For instance, a reform of employment protection can be

captured by a simultaneous reduction in firing costs and in the bargaining power of

individual workers in one model, while it is captured as an increase in total factor

productivity in another model. Important channels may also be missing in the modelling

framework. In particular, the precautionary motive for saving and hence the adverse

confidence effects arising from higher job and income volatility cannot be easily featured

in such frameworks. Finally, to ensure models are tractable, analyses are typically limited

to a small set of structural reforms, (most often product and labour market reforms that

reduce price and wage mark-ups), which remains highly stylised.

Empirical analysis based on aggregate or sectoral data

●

There have been very few empirical studies that have used reduced-form equations to

estimate the impact of reforms with a focus on the short-run effect using cross-country

aggregate data or sectoral data:

Studies using aggregate data

include Bouis et al., (2012)

[14],

Fiori et al., (2012)

[15],

Mooji and Keen (2012)

[16].

For example, Bouis et al., (2012) estimate average impulse

responses in terms of employment and output after one to five years following different

types of structural reforms (e.g. product market reforms), based on a panel data of

OECD countries over the period 1983 to 2007.

Studies using sectoral data

include Bourlès et al., (2013)

[17]

and Dabla-Norris et al., (2015)

[18].

The latter estimates the impulse response mostly in terms of productivity after

three years and five years following several types of structural reforms, based on a panel

data of 23 industries in 11 advanced economies over the period 1970-2007.

●

While the estimation of reduced-form equations allows for a flexible empirical

specification and the assessment of the impact of a wide array of reforms, it does not

identify the channels through which reforms affect output or employment. Furthermore,

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2. REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

the often incremental nature of reforms makes it difficult to clearly identify the short-run

impacts. Estimations are also prone to specification error. For instance, a failure to control

for the possible complementarity across reforms can bias the estimated impacts of a given

reform (Bassanini and Duval, 2009

[19]).

Empirical analysis based on micro studies

Another branch of studies infers the impacts of structural reforms by investigating

and looking at event studies and assessing the change in the variables of interest before

and after a specific episode of reforms. Such event studies often employ a difference-in-

difference or regression discontinuity estimation approach that exploits a micro panel

dataset covering the periods before and after the reforms. Some studies also infer general

tendencies on the effectiveness of specific reforms from a meta-analysis of the existing

empirical evidences.

●

Studies on wage bargaining/minimum wage reforms

include Neumark et al., (2013)

[20],

Anton and Muñoz de Bustillo (2011)

[21]

and Martins (2014)

[22].

Studies on EPL reforms

include Kugler and Pica (2008)

[23],

Von Below and Thoursie (2010)

[24]

and Orsini and Vila Nunez (2014)

[25].

Kugler and Pica (2008) assess the consequences

of Italy’s legislation that strengthened the protection of regular employment for firms with

less than 19 employees.

Studies on unemployment benefits reforms

include van Ours and Vodopivec (2006)

[26]

and

Uusitalo and Verho (2010)

[27]

studying the effect of duration and replacement rate on

unemployment duration from the reforms in Slovenia and Finland, respectively.

Studies on ALMPs

include Crépon et al., (2005)

[28],

Rosholm and Shaver (2008)

[29]

which

report significant impact on unemployment duration. Less favourable finding is reported

for instance by Crépon et al., (2013)

[30].

Kleuve (2010)

[31]

provide a meta-analysis of

previous assessments.

Studies on pension reforms

include Cribb et al., (2014)

[32]

that observed the consequences

of a UK reform raising women’s pension eligibility age on their labour supply and

unemployment rate.

Studies on product market reforms

include Golsbee and Syverson (2008)

[33],

Bertrand and

Kramarz (2002)

[34]

and Skuterud (2005)

[35].

Also, Faini et al., (2006)

[36]

provide case

studies of liberalisation and privatisation in different sectors in three European countries.

●

While event studies allow for richer and more rigorous inference on reform impacts

than the two previous methods, their focus on a specific policy in a given time and a

country makes it difficult to generalise their findings. Also the aggregate macroeconomic

implications are not always clear when the analysis focuses on very specific reforms and

markets.

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REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

Table A2.1.

The impact of structural reforms in normal times: a synthesis

Reform area

Collective wage

bargaining arrangement

and minimum wages

Channels of transmission

●

Evidence on short-term impacts

Model-based evidence:

●

Employment gains exceed short-term real wage losses. Small

and temporary negative impact on inflation

([1], [2]).

●

Moderate increase in consumption, investment and GDP.

Small net effect on the current account. ([1],

[2]).

Evidence from empirical analysis:

●

Aggregate data:

Empirical analysis confirms short-term gains

in employment, consumption and GDP of reduction in the excess

coverage of collective wage agreements. Less evidence of impact

on investment.([14])

●

Micro studies:

Most studies find negative employment effects

of minimum wages, especially for youth and low-skilled ([20],

[21]).

Effect of extending collective wage bargaining is found

to be similar to minimum wage.([22])

Model-based evidence:

●

Small positive effect on consumption despite initial

and short-lived rise in unemployment. More rapid positive effect

on investment and GDP. No visible effect on net exports.([12])

Evidence from empirical analysis:

●

Aggregate data:

No evidence of significant impacts on

consumption or GDP but mild positive effect on private investment

([14]). No evidence of significant positive effect in the five-year

horizon. Some evidence of negative effects on productivity

and output at the 2-3 years horizon ([18]).

●

Micro studies:

Increase in lay-off rates is generally found

to exceed the rise in hiring rates in the short term leading

to higher unemployment ([23],[24]). Some evidence of increase

in on-the-job search by employees on open-ended contracts

following recent reform in Spain ([25]).

Model-based evidence:

●

Positive gains GDP, investment and to a lesser extent consumption.

Decline in consumption for LC-households more than offset

by increases for others through wealth effects ([5]). Unemployment

falls as employment rises more rapidly than labour force. Small

positive contribution from net exports ([12]).

Evidence from empirical analysis:

●

Aggregate data:

Positive impact on employment across all age

and gender groups, as well as on consumption and GDP ([14]).

●

Micro studies:

Reduction in replacement rates and/or duration

lead to a short-term increase in employment among those closer

to benefit exhaustion ([26],

[27]).

●

Raises responsiveness of wages to local labour and product

markets.

Puts downward pressures on real wages, in particular

for low-skilled workers but raises labour demand with

an ambiguous effect on aggregate disposable income

and consumption.

If reduced costs lead to higher mark-ups for firms,

this may raise investment among firms dependent

on internal financing.

If the lower costs are largely and quickly passed through

lower prices, then net exports may contribute to short-term

demand gains.

Employment

protection legislation

on open-ended contracts

●

Reduces wage bargaining power of employees on regular contracts.

Increases both hiring and lay-off rates by reducing expected costs

of terminating a match. Boosts long-run productivity

by encouraging job-to-job mobility and facilitating reallocation

of workers across firms and sectors.

Net impact on

consumption

ambiguous: Impact on disposable

income depends on employment and wages. Higher wealth

through future productivity and income gains but potentially

higher precautionary saving if increased instability

in employment.

Impact on

investment

and on

net export similar

to that of reform

of wage bargaining. Potential wage moderation effect of reform

reflected in improved competitiveness and/or higher mark-ups.

Unemployment benefits:

Extension of the benefit

coverage, stronger

conditionality

and tapering of benefits

along the spell

●

Lowers benefits and the reservation wage of the unemployed

and puts downward pressures on wages.

Raises incentives to take-up jobs and labour demand. Stimulates

job creation without affecting job destruction.

Net effect on disposable income and

consumption

depends on

speed of employment gains and strength of wealth effect arising

from higher future income.

Speed of rise in employment depends on extent of vacancies left

unfilled due to high reservation wage. Employment gains further

accelerated if reform is accompanied by lower social security

contributions.

Households not directly involved by the reform may raise

precautionary savings to compensate for reduced generosity

of benefits.

Active labour market

policies:

Job search assistance,

training programmes

and hiring or wage

subsidies

●

Improves matching efficiency and facilitates reallocation of labour;

Model-based evidence:

raises employment in the short run and productivity

●

Impact of budgetary neutral reforms of ALMPs is similar

in the long run.

to that of reduction in unemployment benefit, except for more

rapid increase in labour demand ([5],

[12]).

If unfunded, raises disposable income and can be perceived

by firms as a reduction in non-wage costs. Effect on consumption

●

Unfunded increases in ALMP spending have stronger

and investment works like fiscal expansion and depends on size

positive effects on demand in the first two years than after

of multiplier.

five years ([8],

[9]).

Evidence from empirical analysis:

●

Aggregate data:

Increases in ALMP spending, after controlling

or cyclical influences, are found to raise aggregate employment

but not consumption or GDP ([14]).

●

Micro studies:

Most studies (though not all) find evidence

that active job search assistance and mandatory participation

to programmes help reduce the duration of unemployment

in the short term ([28],

[29], [31]).

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2. REFORM PRIORITIES IN A DIFFICULT MACRO CONTEXT

Table A2.1.

The impact of structural reforms in normal times: a synthesis

(cont.)

Reform area

Pension systems:

Increase

in the retirement age,

reduction in pension

benefits or rise

in contributions

Channels of transmission

●

Evidence on short-term impacts

Model-based evidence:

●

Positive effect on consumption and GDP in the case of increases

in the retirement age. Evidence less clear in the case in the cases

of benefit reductions or rises in contributions as their effect

is similar to a (deferred) fiscal contraction. They are found to lower

consumption and investment but to have a positive effect on net

exports, with a net small or negative impact on GDP ([11]).

Evidence from empirical analysis:

●

Aggregate data:

An increase in the retirement age has a positive

impact on consumption, investment and GDP ([14]).

●

Micro studies:

Some studies find a non-negligible positive

short-term impact on employment rates of affected population

but also a rise in unemployment ([32]).

●

Raising the retirement age increases pension wealth by extending

working lives. Raises

consumption

for non-liquidity constrained

households, if confident about prospects of keeping jobs at age

close to pension.

Reducing pension benefits has the opposite effect if workers seek

to maintain pension wealth and retirement age. Negative effect

consumption

amplified if benefit reductions applied

to all current pensioners.

Increasing contribution rates reduces disposable income

and/or mark-ups depending on whether measure is borne

by workers or firms. May be partly offset by a positive

wealth effect if contributes to future pension funding.

Product market:

Reduction in regulatory

barriers to competition

●

Stronger competition reduces mark-ups and export prices, lowers

Model-based evidence:

input prices and production costs in downstream industries

●

Modest short-term GDP gains with more visible impacts after

and raises productivity through process (efficiency gains)

2-3 years ([8],[9]). Slowly rising gains in investment

and product innovation.

and (to a lesser extent) consumption (prompted by real wage gains)

and negative contribution from net exports. Employment rises

Upward pressures on investment through future profitability gains

in services but falls in manufacturing. One study finds consumption

and entry of new firms but also downward pressures through lower

falling in the 2-3 years horizon due to higher real interest rate ([12]).

mark-ups (for cash-flow-constrained incumbents).

Evidence from empirical analysis:

Upward pressures on consumption through positive disposable

income (lower prices and gains in employment) and wealth effects.

●

Aggregate data:

No significant short-term impact on GDP

[14].

Downward pressures if lower mark-ups and prices lead to high real

Evidence from sector-level data indicates productivity gains

interest rates (e.g. in monetary union) or if business restructuring

within 2-3 years on average

[17]

but one study finds that the impact

initially lead to high job turnover and income instability and hence

on productivity in professional services is negative in the first

higher precautionary saving.

2-3 years but turns positive after 5 years

[18].

Rapid employment gains in sectors with strong pent-up demand

●

Micro studies:

Industry-specific analyses provide evidence of rapid

and low entry costs.

price declines in response to reduction in entry barriers ([33]).

Rapid gains in productivity, employment and output are found

in industries such as retail trade or telecommunication ([34],

[35],

[36]).

In other industries, a significant productivity gain

but a decrease in employment is reported, as firms enhance

competitiveness by reducing initial over-manning ([36]).

Reductions in capital and labour taxation raise employment and

Model-based evidence:

investment

until initial return to both production factors is restored.

●

Increases in investment and net exports only partly offset

by a decline in consumption, leading to moderate short-term gains

Positive impact of employment gains and lower income taxes on

in GDP ([6]). Since the gains in employment due to competitiveness

disposable income offset by higher price level from increased VAT.

are temporary, the increase in employment is stronger in the short

Higher price effect likely to dominate in the short run, entailing a

than long term ([8]).

reduction in

consumption.

Shift in relative price of domestic and foreign goods will boosts

net Evidence from empirical analysis:

exports

unless quickly offset by nominal exchange rate adjustment.

●

Aggregate data:

A decline in the share of income tax in total tax

revenues is found to have a positive impact on investment

but no significant effect on consumption or GDP ([14]). Strong

positive impact found on net exports in euro area countries

but smaller effect in non-euro area OECD countries ([16]).

Tax structure:

Shift in the composition

of taxation from direct

(capital, labour)

to indirect sources

(VAT, property,

inheritance)

●

Note:

The numbers in brackets in bold script indicate the studies cited earlier in the Appendix 2.1. For instance, [1] corresponds to

ECB (2015).

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Economic Policy Reforms 2016

Going for Growth Interim Report

Chapter 3

From GDP to average household

income: A look at the transmission

channels

This chapter reviews the association between GDP and living standards from the

perspective of the average household, focusing on the income dimension. It

discusses the mechanisms through which GDP growth “trickles down” to household

sector income with a view to assessing whether and to what extent such

mechanisms are amenable to policy intervention. To do so, the chapter provides a

proper assessment of the link between income generated from GDP and income

distributed to households, which implies examining income distribution between

household and the non-household sectors of the economy.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli

authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights,

East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

From GDP to average household income: A look at the transmission channels

Main findings

●

Real GDP has tended to grow by more than real household income in the majority of

OECD countries between the mid-1990s and 2013.

This growth gap is partly due to factors having little policy traction, such as differential

developments between the price of domestic output and the price of consumption

faced by domestic households, driven notably by terms-of-trade effects: consumption

prices have tended to rise relative to output prices in most OECD countries over the

period, the only exceptions being commodity exporters such as Norway, Australia

and Canada.

The household income share of GDP, simply defined as the ratio of nominal household

disposable income over nominal GDP, has been stable over the period, on average across

OECD countries, but with cross-country heterogeneity, with for instance a large decline

in Austria and Korea and a large increase in the Slovak Republic and Finland.

Developments in the household income share of GDP reflect developments in the

distribution of production income between the household and non-household sectors of

the economy. This can in turn be assessed by looking at household labour, capital and

secondary income shares of GDP:

❖

About half of OECD countries have experienced a decline in the labour share of GDP, in

particular Portugal, Slovenia and Japan, while the other half have experienced an

increase, though of a lower magnitude.

❖

The vast majority of OECD countries have experienced a decline in the household

capital income share of GDP, in particular Belgium and Italy, while only a few

countries, including Portugal and the United States, have seen an increase.

❖

Concomitant declines in the labour and household capital income shares of GDP could

suggest that a rising share of profits has been retained by the corporate sector instead

of being redistributed to the household sector.

❖

The decline in the household capital income share of GDP could be overstated to the

extent that the corporate sector has been reducing the use of dividends in favour of

alternative profit redistribution mechanisms to shareholders, such as share buybacks

– and that associated capital gains are not recorded in macroeconomic data.

❖

The vast majority of OECD countries experienced an increase in the household

secondary income share of GDP over the past two decades, i.e. in the share of

production income that is being redistributed by the government to the household

sector. However, this largely reflects the increases in public income transfers

over the early phases of the crisis, which cushioned household incomes from the

fall in GDP.

●

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

❖

In addition, the increase in the secondary household income share could be overstated

to the extent that it does not allow for measuring the negative effect of a shift in the tax

composition from direct to indirect sources, in particular consumption taxes; yet

associated reforms have been quite frequent across the OECD over the last two decades.

●

The analysis did not reveal clear links between the changes in income distribution at the

macro-level and the rise in income inequality within the household sector experienced

by many OECD countries over the last decades.

Introduction

GDP per capita is a widely used measure of living standards and a key headline indicator

of economic performance. The emphasis given to GDP growth relies on the assumption that

higher GDP per capita is associated with rising living standards for most households. This

view has been increasingly challenged. On its own, GDP per capita falls short of accurately

measuring people’s wellbeing, even from a narrow material living standard perspective.

that respect, one issue that has received little attention is the extent to which GDP growth

“trickles down” to households. Yet this is of primary relevance from a wellbeing perspective,

as recognised for instance by the Stiglitz Commission (Stiglitz et al. 2009).

Assessing the links between GDP growth and household income growth is also of

particular interest for the understanding of developments in income inequality.

How GDP

growth generates income for the household sector, and the composition of this income, are

important factors for inequality. For instance, the distribution of income between labour

and capital does matter for understanding income inequality. However, assessing this may

have become more complex than in the past as households have more diverse sources of

income and there is considerable dispersion within the categories of income. It is thus

important to go beyond the classic concept of labour share to understand inequality,

notably by enlarging the concept to the different types of household income sources.

Given these challenges, the chapter analyses the association between GDP and living

standards from the perspective of the average household, focusing on the income

dimension. The idea is to better understand the mechanisms through which GDP growth

“trickles down” to household sector income. This justifies a proper assessment of the link

between income generated from GDP and income distributed to households, which implies

examining income distribution between household and non-household sectors of the

economy.

The chapter is structured as follows: the first section describes the measurement

framework used throughout the chapter, based on the System of National Accounts (SNA).

The second section delivers a snapshot overview of developments in real household

income compared to GDP over the last two decades. It also sheds light on the drivers that

are, in principle, least amenable to policy intervention, e.g. differential developments

between the prices faced by households and those of domestic output and primary income

flows with the rest of the world. The third section analyses how income generated from

domestic production is distributed between the household and non-household sectors of

the economy, in particular the general government and the corporate sector, with a focus

on the functional income distribution, in other words on income distribution between

labour and capital. The fourth section delivers an assessment of the link between income

distribution across household and non-household sectors and income distribution within

the household sector.

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Adjusted Household Disposable Income: definition and cross-country patterns

For the purpose of this chapter, the level of resources accruing to the household sector

is gauged through adjusted household disposable income (AHDI) from the National

Accounts, combining information on a large number of market and non-market income

sources (including income derived from hidden or underground activities).

This is

considered as the best available measure of material conditions from a cross-country

perspective, although it may not be fully reflective of households’ command over economic

resources (Box 3.1).

For ease of exposition, Figure 3.1 provides a simplified overview of

income flows between the household and non-household sectors of the economy as

measured in the SNA.

Box 3.1.

Adjusted household disposable income

from the national accounts: limitations

Adjusted household disposable income from the national accounts includes some non-

cash items that households may not recognise as part of their income:

●

Employer contributions to social security, and employer payments for private pensions,

healthcare, and other benefits do not enter the pay-packets of workers but are part of

household income in the national accounts. This is because compensation of employees

is defined in the national accounts with a view to explicitly measuring the full cost of

labour as a factor of production. For example, whereas in the real world social

contributions are paid directly by the employers to the social funds and are never seen

by the employees, the national accounts treat them as part of wages paid to households.

As a result, the “compensation of employees” item includes all contributions, including

imputed contributions. In this chapter, this item is included in the definition of labour

income.

Homeowners-occupiers do not receive an income from the housing services that they

provide to themselves. Yet an income is imputed in the national accounts, called

“imputed rent”. This income flow is estimated based on actual rents of comparable

accommodations, but national statistical offices apply different methodologies in this

respect. In this chapter, this item is included in the definition of household capital

income.

Households benefit from the services supplied by general government, such as

healthcare, education, housing, recreational and cultural services, but associated

transfers are not spendable. The national accounts attribute to household income an

imputed value for such services, i.e. “social transfers in-kind”, to distinguish them from

cash transfers. Their measurement is problematic given the non-market nature of these

services (and could be very different from the household point of view). Indeed, the

national accounts valuation of social transfer in-kind is based on the price of inputs

used in the production process, hence on expenditure by general government. In this

chapter, this item is included in the definition of household secondary income.

●

The non-recording of capital gains and losses is another limitation of the household

income account. Agents face a potential holding gain or loss whenever the price

fluctuates. A distinction is made between “unrealised” and “realised” gains and losses. A

typical unrealised gain or loss occurs when the price of a share held by an agent changes

but when the agent has not yet sold his holdings. By contrast, realised gains (or losses)

result from the sale of the shares. The proceeds received from the holding gain are in most

cases subject to taxation.

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Box 3.1.

Adjusted household disposable income

from the national accounts: limitations

(cont.)

Households in OECD countries have on several occasions in the recent past benefited

from rises, or suffered from falls, in the prices of these two types of assets; for instance

during the stock market bubble toward the end of the 1990s, and the steep drop in stock

prices starting in 2000 and more recently, during the housing market bubble. Asset price

changes induce positive or negative wealth effects, allowing household to consume more

or less than their disposable income. These so-called “wealth effects “may play a major

role in households’ perception of own economic resources, but they cannot be inferred

from national accounts.

Against this background, household capital income as defined in this chapter based on

the SNA excludes capital gains and losses, whether realised or not. Income from housing

assets is included insofar as it reflects actual and imputed rents (the latter accruing to

homeowner occupiers). Financial income covers interest received on households’ financial

investments and dividends paid by companies to households but, due to the exclusion of

capital gains, other forms of financial income are excluded from the SNA. Such is the case

of share buy-backs, which have been playing a growing role in corporate profit

redistribution strategy. This income transfer from firms to households is not recorded in

the household income account.

Finally and related to the previous point, the impact of the external sector on household

income in the SNA covers essentially primary income, that is, income from work,

dividends and interest. Financial transactions with the rest of the world do not affect

household income nor do they affect GDP. By contrast, such transactions affect the balance

sheet of resident institutional sectors as defined in the SNA: households, the general

government and corporations. As a result, external macroeconomic imbalances stemming

from e.g. net borrowing

vis à vis

the rest of the world do not influence the distribution of

income between the general government and households but may eventually influence

the distribution of wealth and savings between the general government and households,

an issue that goes beyond the scope of the current chapter.

AHDI is obtained by adding two broad components: 1) the flows that make up

individuals’ primary (or market) income: labour income (compensation of employees and

labour income of the self-employed – the latter being part of “mixed income”) and capital

income (income derived from financial assets, essentially dividends and interest, included

under “property income” and from non-financial assets, essentially actual and imputed

rents, included under “operating surplus”, as well as self-employment capital income – the

latter being part of “mixed income”); and 2) secondary or redistribution income: the cash

and in-kind social transfers that households receive from governments (such as public

education and healthcare services) net of the current taxes on income and wealth and the

social security contributions paid by households. In this respect, consumption taxes are

not considered among taxes paid by the household sector in the SNA. They appear in the

difference between GDP at market prices and GDP at factor costs (i.e. GDP at market prices

minus taxes on production and imports). AHDI can be expressed both in gross and net

terms, with the difference being households’ consumption of fixed capital.

The bulk of

this chapter relies on the gross measure to make the link with GDP, which is a gross

concept, and because of better cross-country comparability.

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Figure 3.1.

Income flows between the household and non-household sectors:

a simplified overview of the System of National Accounts (SNA)

GNI

at market prices

(=GDP at market prices +

primary incomes received

from the rest of the

world-primary incomes paid

to the rest of the world)

GDP at market prices

GDP at factor cost

(= GDP at market prices – taxes on

production and imports)

Corporate

sector

Household sector

(including self-employed firms)

Government

sector

Pro

Compensation of

employees

per t

y in

c om

loy

r in

Operating surplus

Self-employment

capital income

Social benefits and

transfers + social

transfers in kind

Current taxes on

income and wealth

l f- e

Labour income

Compensation of employees

(= wages and salaries +

employers’ social security

contributions)

Self-employment labour

income (under “mixed

income”)

Household Capital Income

Actual and imputed rents

(“operating surplus”)

Capital income from financial

assets (“property income”)

Self-employment capital income

(under “mixed income”)

Household Secondary Income

Social benefits and transfers +

social transfers in kind – current

taxes on income and wealth

Household primary income

(market income)

Household secondary income

= Adjusted Household Disposable Income (AHDI)

1. In the case of self-employed, only overall (mixed) income is reported. In order to split their income into the labour

and capital components, the labour income of self-employed is imputed by assuming that their annual wage is

the same as for the average employees of the whole economy. The capital income is then approximated by taking

the difference between mixed income of self-employed and their imputed labour income.

2. Household primary income corresponds to income derived from market activities and is sometimes referred to as

“market income”.

The limitations associated with the definition of household income in the SNA should be

kept in mind and differences across countries and over time should therefore be interpreted in

light of different institutional arrangements. Nevertheless, the SNA system relies on a number

of harmonising procedures implemented with a view to maximising cross-country

comparability. Importantly for the purpose of this chapter, such procedures ensure a very good

level of comparability for the household income account. Comparability may be more

problematic for the household financial and balance sheet accounts and this may limit cross-

country analysis of household wealth and savings. One of the most relevant issues in this

respect is the recording of pension contributions and pension benefits of employees between

capitalisation and pay-as-you go systems (Box 3.2). This chapter performs a comparative

analysis of household income but not of household wealth. As a result, the analysis should not

be affected by differences in institutional arrangements governing countries’ pension systems,

reflecting harmonising adjustments applied within the household income account.

For the average household, the main income component is compensation of employees,

followed by self-employment income

and transfers in-kind provided by the government

(Figure 3.2, Panel A). When the AHDI decomposition is simplified into labour and capital

income (which make up primary income) and secondary income, labour income appears as

the most important income source in most countries (Figure 3.2, Panel B).

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Box 3.2.

How pension and social security funds are recorded

in the household income accounts

One can distinguish two main types of pension systems: those functioning as “savings

plans” (also called “full capitalisation systems”) and those functioning as “transfer plans”

(also called “pay-as-you-go systems”). If the pension plan is a savings plan (often called a

“pension fund”), each employee contributes to a fund from which his or her future pension

benefit will be paid. The national accounts record all contributions to the plan (both those

of employers and of employees) as a form of savings by employees (i.e. an increase in the

pension asset of employees) and pension benefits as “dis-saving” (i.e. a decrease of the

pension asset of retirees).

By contrast, a pension system is a transfer plan (rather than a savings plan) when the

pension contributions of current employees are used to pay the pension benefits of current

retirees. In this case (which is typical of social security pension systems), the national

accounts deduct pension contributions from income (and thus they are also deducted

from savings), and pension benefits are considered part of income (and thus included in

savings). Pension contributions are included in current transfers paid by households and

pension benefits in current transfers by households.

To harmonise the measure of household income, the SNA framework records pension

contributions and benefits of savings plans (i.e. pension funds) as if they were transfer

plans (i.e. social security).

As a result, cross-country comparisons of household income

accounts are in principle unaffected by cross-country differences in the institutional

settings governing the funding of pension systems. In this chapter, pension benefits and

contributions are included in the definition of household secondary (net) income, being

considered as transfer income.

* This (transfer) income flow from the corporate sector to the household sector is not shown in the simplified

overview of income flows between SNA sectors (Figure 3.1). In principle, it would appear as a secondary

income flow from the corporate sector (pension funds) to the household sector.

Tracking income growth from the household perspective and explaining

the gap

vis-à-vis

GDP growth

From a welfare perspective, household income growth is best measured in real

consumption terms (i.e. changes in nominal household income should be deflated with

consumption prices and not with output prices which are used to deflate GDP). This is

what ultimately matters to assess household consumption possibilities as a function of

production income. Tracking growth from the household income perspective thus starts

with the simple comparison between growth in GDP and growth in real adjusted household

income with a view to assessing the extent to which income generated from GDP trickles

down to the average household. This comparison suggests that since the mid-1990s and in

particular over the pre-crisis period, GDP has tended to grow more than households’

economic resources in many OECD countries (Figure 3.3, Panels A and B). The gap was

particularly large in Korea and Ireland. In fact, only a few countries with large commodity-

producing sectors experienced stronger gains in real household incomes relative to GDP

(e.g. Norway and Australia).

The growth gap between GDP and household incomes temporarily narrowed during

the initial phase of the crisis, as automatic stabilisers (i.e. rises in net income transfers

from government to households during recessions) and discretionary income-support

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Figure 3.2.

Components of adjusted household disposable income

(AHDI)

As a percentage of gross adjusted household disposable income, 2013

A. Detailed overview

200

175

150

125

100

-25

FIN

ITA

IRL

SVN

GRC

GBR

KOR

HUN

MEX

NLD

SVK

ESP

CZE

DNK

SWE

DEU

CHE

USA

JPN

CHL

POL

PRT

FRA

AUT

EST

BEL

NZL

-50

Compensation of employees

Property income

Current taxes on income, wealth etc.

Operating surplus

Social transfers in kind

Mixed income

Social contributions and transfers

200

175

150

125

100

-25

-50

B. Simplified overview

120

110

100

-10

Labour income

Capital income

Secondary income

120

110

100

-10

MEX GRC PRT ITA POL SVK ESP USA FIN CZE FRA DEU GBR AUT HUN SWE JPN IRL SVN EST BEL NLD DNK CHE

1. The data refer to the components of gross adjusted household disposable income based on the System of National Accounts. The sum

of compensation of employees, property income, operating surplus and mixed income (i.e. labour and capital income of the self-

employed) represents primary or market income. Social contributions and transfers and social transfers in kind minus current taxes

on income and wealth represent secondary income (income that the government redistributes to households directly or indirectly).

See Figure 3.1 for a definition of the respective components shown in panels A and B. Components do not exactly sum to household

gross adjusted disposable income due to statistical discrepancies. Data refer to 2014 for Czech Republic, Denmark, Finland, Italy, the

Netherlands, Portugal and Sweden; 2012 for New Zealand and Switzerland. For Chile and Korea, the component “Operating surplus”

includes mixed income.

Source:

OECD,

National Accounts Database.

1 2

http://dx.doi.org/10.1787/888933323992

measures introduced to moderate the fall in aggregate demand at the early stages of the

recession had the effect – to a varying extent across countries – of protecting households’

disposable incomes from recession-induced losses in market incomes (i.e. income from

work and capital) (Figure 3.3, Panel C).

However, with the effect of automatic stabilisers

and anti-crisis measures tapering off, the diverging trends resumed as GDP growth largely

outpaced household income growth in 2009-13 (Figure 3.3, Panel D). Indeed, more than one

third of OECD countries experienced contracting household real disposable incomes in

post-crisis years, reflecting in part the impact of fiscal consolidation.

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Figure 3.3.

Real annual growth rates of GDP and adjusted household disposable income

(AHDI)

Average annual growth rates, percentage

Gross adjusted household disposable income per capita

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

ITA

-1.0

-1.5

-2.0

-1.5

-1.0

-0.5

0.0

A. 1995-2013

SVK

NOR

NZL

USA

AUS

KOR

FIN

GBR

SVN

CZE

FRA

CHE CAN SWE

DNK

HUN

JPN

DEU NLD AUT

BEL

ESP PRT

IRL

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

0.5

1.0

1.5

2.0

2.5

3.0

B. 1995-2007

Gross adjusted household disposable income per capita

5.5

5.0

4.5

4.0

3.5

NOR AUS

3.0

USA NZL GBR

2.5

SWE

2.0

FRA CAN

NLD

1.5

PRT ESP

CHE

AUT

1.0

DNK

JPN

0.5

BEL

DEU

ITA

0.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Gross adjusted household disposable income per capita

-2

-4

-6

-8

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

EST

IRL

3.5

4.0

GDP per capita

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

SVK

HUN SVN

CZE

FIN

KOR

IRL

3.5

4.0

4.5

5.0

5.5

GDP per capita

C. 2007-09

CHL

POL

KOR

BEL

NOR

SVK

CAN PRT

ESP CZE

SWE SVN

FIN

NLD AUS

DNK GRC DEU

CHE

FRA

ITA JPN GBRUSA NZL AUT

HUN

MEX

-2

-4

-6

-8

-10

GDP per capita

Gross adjusted household disposable income per capita

-1

-2

-3

-4

-5

-6

-7

GRC

-8

-9

-8

-7

-6

-5

-4

D. 2009-13

MEX

NZL

NOR

SWE JPN POL

CHE AUS

FIN

DNK FRA CZE CAN USA DEU

HUN

SVK

SVN NLD GBR AUT

BEL

PRT

IRL

KOR

EST

CHL

ITA

ESP

-1

-2

-3

-4

-5

-6

-7

-8

-9

-3

-2

-1

GDP per capita

1. Gross adjusted household disposable income and GDP are expressed in USD, constant prices and constant PPPs, OECD base year 2010.

Gross adjusted household disposable income is deflated with the deflator for actual individual consumption while GDP per capita is

deflated with the GDP deflator. For panel A, data refer to 1995-2014 for Canada, Czech Republic, Finland, Italy, Korea, the Netherlands,

Norway, Portugal and Sweden; 1995-2012 for Switzerland; 1999-2013 for Hungary, Ireland, Spain and the United Kingdom; 1999-2012

for New Zealand; for panel B, data refer to 1999-2007 for Hungary, Ireland, Spain, the United Kingdom and New Zealand; for panel C,

data refer to 2008-09 for Chile; for panel D, data refer to 2009-14 for Canada, Czech Republic, Finland, Italy, Korea, the Netherlands,

Norway, Portugal and Sweden; 2009-12 for New Zealand and Switzerland.

Source:

OECD,

National Accounts Database.

1 2

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

The contribution of relative price movements to the growth gap

Differential developments between GDP and household income in real terms may

reflect differential developments between consumption and output prices (Figure 3.4, Panels

A and B). Indeed, different price indices are used to convert nominal values in real values,

respectively the GDP deflator for domestic output and the consumption deflator for

household income.

The comparison between real and nominal terms shows that a very large part of the

growth gap between GDP and real household income is due to relative price effects over the

period under consideration (i.e. 1995-2013). Most OECD countries experienced declines in

output relative to consumer prices while the only ones experiencing increases in output

prices relative to consumer prices are commodity-exporters such as Australia, Canada and

Norway (Figure 3.4, Panel C) – pointing to terms-of-trade effects. In nominal terms, growth

in household income was remarkably close to GDP growth.

Such relative price effects could reflect a number of factors, including:

●

Secular declines in the relative price of investment reducing output prices more than

consumer prices, and, related, secular declines in the price of tradable relative to non-

tradable products, especially in services.

Temporary increases in commodity prices generating favourable terms-of-trade effects

in commodity-exporting countries over the period under consideration.

Increases in consumer prices resulting from tax reforms shifting the burden from direct

to indirect taxes and in particular to VAT over the period under consideration.

●

The contribution of cross-border income flows to the growth gap

Part of the gap between growth in GDP and household income may also reflect that

between the income produced within the territory and the income received by residents.

Household incomes are measured for resident units, regardless of whether these incomes

are obtained within the national territory or not. In addition to the income received from

the production within the territory, which is included in GDP, residents may receive income

derived from production outside the territory, which is excluded from GDP.

Adding the

net primary income flows with the rest of the world to GDP allows for coming closer to the

resources that can trickle down to resident households. These primary incomes consist of

wages and salaries, property income (interest and dividends) and taxes and subsidies on

production. The final result is Gross National Income (GNI), which can be considered as a

“bridge” measure: GNI is, unlike GDP, an income-based concept and not a production based

concept, since it includes income derived from production abroad and excludes the value

of output repaid to foreign factors of production. As a result, assessing developments in

household income relative to GNI instead of GDP underscores the potential role of primary

income flows with the rest of the world.

A look at the evolution of GNI suggests that developments in primary income flows

with the rest of the world also account for part of the growth gap between real GDP and real

household income (Figure 3.5, Panels A and B), but to a much lesser extent than relative

prices. Weaker GNI relative to GDP growth seems to have contributed to weaker growth of

household income relative to GDP in e.g. Belgium and Korea (Figure 3.5, Panel C). At the

opposite end of the spectrum, stronger GNI relative to GDP growth seems to have

contributed to stronger growth of household income relative to GDP in e.g. Australia and

Norway, which suggests that associated foreign income inflows were also driven by rising

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Figure 3.4.

Comparing growth in GDP and in AHDI: the role of relative prices

1995-2013

A. Real annual average growth rates in GDP and in AHDI, percentage

Gross adjusted household disposable income per capita

4.0

3.5

3.0

NOR

AUS

2.5

NZL

2.0

USA

SVN

FIN

GBR

CAN SWE CZE

1.5

FRA

NLD

DNK

HUN

1.0

ESP

DEU CHE

0.5

PRT BEL AUT

JPN

0.0

ITA

-0.5

-1.0

IRL

-1.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

SVK

KOR

3.0

3.5

4.0

GDP per capita

B. Nominal annual average growth rates in GDP and in AHDI, percentage

Gross adjusted household disposable income per capita

-1

GDP per capita

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

JPN

USA FIN NZL

IRL SWE

ESP

GBR

FRA DNK

CAN

NLD

DEU

BEL AUT PRT

CHE ITA

AUS

CZE

KOR

NOR

SVN

SVK

HUN

-1

Output prices

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-1.0

C. Annual average change in output and consumer prices, percentage points

HUN

SVN

SVK

IRL

CHE

AUS CZE

ITA

ESP KOR

CAN

PRT GBR

SWE FIN

FRA AUT

BEL

DEU

DNK

USA

NLD

NOR

NZL

JPN

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Consumer prices

1. For panel A, gross adjusted household disposable income per capita and GDP per capita are expressed in USD, constant prices and

constant PPPs, OECD base year 2010. Gross adjusted household disposable income per capita is deflated with the deflator for actual

individual consumption (consumer prices) while GDP per capita is deflated with the GDP deflator (output prices). For panel B, gross

adjusted household disposable income per capita and GDP per capita are expressed in current prices. Data refer to 1995-2014 for

Canada, Czech Republic, Finland, Italy, Korea, the Netherlands, Norway, Portugal and Sweden; 1995-2012 for Switzerland; 1999-2013

for Hungary, Ireland, Spain and the United Kingdom; 1999-2012 for New Zealand.

Source:

OECD,

National Accounts Database.

1 2

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Figure 3.5.

Comparing growth in GDP and in AHDI: the role of primary income flows

with the rest of the world

Percentage, 1995-2013

A. Real annual average growth rates in GDP and in AHDI

Gross adjusted household disposable income per capita

4.0

3.5

3.0

NOR

AUS

2.5

NZL

CZE

2.0

USA

CAN

FIN

GBR

1.5

CHE

SVN

FRA

NLD SWE

DNK

1.0

HUN

PRT DEU

AUT

0.5

ESP JPN

BEL

0.0

-0.5

ITA

-1.0

IRL

-1.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

SVK

KOR

3.0

3.5

4.0

GDP per capita

B. Real annual average growth rates in GNI and in AHDI

Gross adjusted household disposable income per capita

4.0

SVK

3.5

3.0

NOR

2.5

NZL

AUS

CZE

2.0

FIN SWE

SVN KOR

GBR

1.5

FRA CHE

HUN

AUT USA CAN

1.0

ESP

DEU

NLD

0.5

PRT DNK

JPN BEL

0.0

ITA

-0.5

-1.0

IRL

-1.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Gross national income per capita

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-1.5

-1.0

C. Real annual average growth rates in GNI and in GDP

4.0

3.5

KOR SVK 3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

3.5

4.0

GDP per capita

AUS

HUN

NZL

CAN SWE

SVN

DEU

CHEUSA

DNK

FIN CZE

GBR

NLD AUT

ESP

IRL BEL

PRT

JPN FRA

NOR

ITA

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1. Gross national income (GNI), Gross domestic product (GDP) and gross adjusted household disposable income are expressed in USD,

constant prices and constant PPPs, OECD base year 2010. For gross adjusted household disposable income, PPPs and deflators are

those for actual individual consumption of households while for GDP and GNI, PPPs and deflators are those for GDP. Data refer to 1995-

2014 for Canada, Czech Republic, Finland, Italy, Korea, the Netherlands, Norway, Portugal and Sweden; 1995-2012 for Switzerland;

1999-2013 for Hungary, Ireland, Spain and the United Kingdom; 1999-2012 for New Zealand.

Source:

OECD,

National Accounts Database.

1 2

http://dx.doi.org/10.1787/888933324022

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

commodity prices over the period under consideration (Figure 3.5, Panel C). Nevertheless,

in most cases, developments in primary income flows with the rest of the world do not

seem to explain much of the wedge between real GDP and real household income

dynamics: indeed, a number of countries (for example Ireland and Italy) experienced

equivalent growth gaps in terms of either GDP or GNI.

A wrap-up on the growth gap of household income vis-à vis GDP

This section has looked at the respective contributions of relative prices and cross-

border income flows to the growth gap between real household disposable income and real

GDP. It finds that the former explains a substantial portion of the gap while the

contribution of the latter is negligible except for a few countries. Taking these factors into

account, the rest of the chapter focuses on the factors potentially driving a wedge between

AHDI and GDP, both expressed in nominal terms.

In order to do so, the chapter introduces the household income share of GDP, a

synthetic measure of the growth dividends from the household perspective, which is

simply defined as the ratio of nominal AHDI to nominal GDP. A significant decline in the

ratio would indicate that a substantial portion of the growth gap in real terms remains to

be explained, even after taking into account relative price effects. As it turns out, such ratio

has been stable over the last two decades, on average across OECD countries (Figure 3.6,

Panels A and B).

Nevertheless, this stability masks differential trends across countries,

with marked declines – of around 6 percentage points – in Austria, Korea, Belgium and

Norway and marked increases – of around 10 and 5 percentage points – in the

Slovak Republic and Finland, respectively (Figure 3.6, Panel B).

The finding of a broad stability on average is formally confirmed by econometric

analysis: the elasticity of adjusted household disposable income to GDP is not statistically

different from unity, once controlling for country-fixed effects and other factors.

This

incidentally implies that the wide cross-country differences in the level of household

income shares of GDP (Figure 3.6, Panel A) tend to persist over time. They are likely due to

factors such as the degree of countries’ openness, their trade structure and industrial

composition.

Income distribution between the household and non-household sectors

This section provides an exploratory analysis of the household income share along its

components with a view to understanding the channels through which production income

(GDP) translates into household income. This requires assessing the link between GDP and

the three household income components defined in the first section: labour and capital

(i.e. primary income); and secondary income, i.e. income redistributed from the

government. This allows for shedding some light on income distribution between the

household and non-household sectors of the national economy, in particular the

government and corporate sectors.

The labour share of GDP

Labour represents the main source of overall income for the average household

(Figure 3.2). Capital income also plays a role, but it represents a comparatively minor

income source and, depending on the mode of capital remuneration, may be redistributed

from the corporate to the household sector with a lag.

As a result, the functional income

distribution, i.e. the division of income generated by domestic production between the

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Figure 3.6.

The household income share of GDP

Nominal terms

A. Household income as a percentage of GDP

100

2013

FIN

AUS

NOR

GBR

NLD

ITA

IRL

DEU

SWE

GRC

HUN

MEX

KOR

DNK

CHE

SVN

CAN

USA

SVK

ESP

CZE

EST

JPN

FRA

AUT

PRT

POL

NZL

CHL

BEL

1995

2007

100

B. Changes in the ratio of household income to GDP, percentage points, 1995-2013

-2

-4

-6

AUT KOR BEL NOR ITA HUN CAN PRT NLD CZE SVN DNK CHE DEU ESP NZL FRA AUS GBR IRL SWE USA JPN FIN SVK

Average

-2

-4

-6

1. Gross domestic product (GDP) and household income are expressed in current prices. For 1995, data refer to 1999 for Hungary, Ireland,

Spain, New Zealand and United Kingdom. For 2013, data refer to 2014 for Canada, Czech Republic, Finland, Italy, Korea, the

Netherlands, Norway, Portugal and Sweden; 2012 for New Zealand and Switzerland.

Source:

OECD,

National Accounts Database.

1 2

http://dx.doi.org/10.1787/888933324036

remuneration of labour and that of capital, hence the aggregate labour share, is likely to

influence in the short to medium term the division of income generated by domestic

production between the household and non-household sectors.

Declines in the labour share have been documented over the past decades, even

though the magnitude of such decline has been the object of controversies.

A wide array

of research has investigated the drivers of this trend, focusing in particular on the role of

globalisation along with that of changing policies and institutions. The main conclusions

from this literature are summarised in the appendix. This section delivers a new

assessment of developments in the labour share on the basis of SNA data.

The labour share is defined as the GDP share of income that is received by workers, be

they employees or self-employed, in the form of labour compensation. Proper

measurement of the aggregate labour share requires addressing a number of issues, such

as estimating the division of income between labour and capital for the self-employed

(Box 3.3).

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Box 3.3.

Measuring the aggregate labour share

The aggregate labour share is typically computed by dividing gross labour compensation by

GDP at factor costs. There are several measurement issues associated with this calculation:

●

Measurement issues in specific industries.

In some industries, measurement of the labour

share is problematic, which could impact on that of the aggregate labour share. For

example, the value added of the public administration, as measured in the national

accounts, is often equal to the sum of labour costs. As a consequence the labour share

may be dramatically inflated in the public sector. Outside the public sector, in industries

such as mining and fuel production, value added fluctuates quite a lot while wages do

not, thereby inducing large fluctuations in the labour share.

Labour compensation of the self-employed:

the revenue of the self-employed is a mix of

labour

and capital incomes, which are typically not identified separately in the national

accounts and appear under the item “mixed income”. This requires imputing

labour

income for the self-employed. There is wide consensus that the remuneration of

proprietor’s labour should be assumed equal to the average compensation of wage

earners (Arpaia et al., 2009).

●

To analyse the mechanism whereby income generated by aggregate production trickles

down to households, the labour share must be defined at the aggregate level by assuming that

wage of the self-employed is the same as for the average employee of the whole economy.

In order to gauge the robustness of the analysis, the aggregate labour share can be

confronted to alternative comparable datasets, relying on recent work published by

Karabarbounis and Neiman (2014). The correlations between the aggregate labour share

estimates of this chapter and those of Karabarbounis and Neiman are very close to one:

they range between 0.90 and 0.95 for the levels and between 0.78 and 0.85 for the annual

changes between 1995 and 2010.

Finally, this chapter uses as a denominator of the labour share of GDP at market prices and

not at factor costs. This is necessary to analyse the link between GDP and household material

living standards with a view to getting closer on the purchasing power of household incomes.

This also takes into account the fact that government absorbs part of the value added (see

European Commission, 2007, for a discussion). In any case, this measurement choice has no

impact on results since the correlation between the labour share measured in terms of GDP at

market prices and factor costs is higher than 0.97 both in levels and differences.

An additional analytical issue is the treatment of those at the top of the pay distribution;

those are often more akin to entrepreneurs, employed by shareholders and rewarded with

stock options which are an entitlement based on future profits and reduce the future

returns to other shareholders. OECD (2012) delivered adjusted labour shares, by excluding

the top 1% earners’ income from the computation of the wage bill for seven countries over

the period 1990 to mid-2000s: this shows that the drop in the “adjusted”

labour

share – or

the labour share for the bottom 99% of income earners – is even greater than the drop in

the “unadjusted”

labour

share, especially for the United States and Canada, due to an

increase in the wage share of top income earners. One recent study estimates that the

labour share excluding the contribution of top incomes has declined so much in the US

that it is lower today than at any other time since the 1930s (Giovannoni, 2014). This may

reflect the surge in CEO and other top executives’ compensation, one of the main driving

forces beyond the broader well-documented finding of an increase in the share of national

income accruing to top incomes (Atkinson et al. 2011, Fernandes et al. 2009, Frydman and

Jenker, 2010). This issue is beyond the scope of the current chapter but is left for future

research, building on recent OECD work on top incomes (Ruiz and Woloszko, 2015).

* An alternative method, when focusing on the business sector and working at the industry level, is to impute

the hourly compensation of a proprietor’s labour share by using the industry average compensation of

employees.

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National accounts data suggest a relative stability in the labour share over the last two

decades, on average across OECD countries for which the data are available (Figure 3.7),

somewhat in contrast with earlier studies. However, this average picture masks cross-

country heterogeneity. Slightly half of the countries experienced a decline in the labour

share: by more than 6 percentage points in Portugal, around 3 in the United States and 2

percentage points in Germany and Spain. Increases in the labour share experienced by the

other half of the countries were of lower magnitude, generally between 1 and 2 percentage

points, except in New Zealand and Sweden where such increases reached almost 5

percentage points.

The difference between the findings of this chapter and of previous studies is likely to

reflect differences in the vintage of the data and the nature of the approach. In particular,

most studies have measured the labour share for a subset of industries as opposed to the

Figure 3.7.

The labour share of GDP

Nominal terms

A. Labour income as a percentage of GDP

SVK CZE ITA PRT IRL HUN NZL ESP SWE KOR AUT FIN NLD DEU DNK GBR JPN USA FRA BEL SVN CHE

2013

1995

2007

B. Changes in the ratio of labour income to GDP, percentage points, 1995-2013

Average

-2

-4

-6

-8

PRT SVN JPN AUT USA ESP DEU KOR NLD CHE GBR SVK HUN DNK BEL

ITA

FIN

IRL FRA CZE SWE NZL

-2

-4

-6

-8

1. The labour share is defined as the sum of employees’ wages and compensation and labour income of the self-employed, over GDP.

Labour income of the self-employed is imputed by assuming that their annual wage is the same as for the average employee of the

whole economy. GDP and wages and compensation are expressed in current prices. For 1995, data refer to 1998 for the United States;

1999 for Spain, the United Kingdom, Hungary, Ireland and New Zealand. For 2013, data refer to 2014 for Czech Republic, Finland, Italy,

Korea, the Netherlands, Portugal, Sweden; 2012 for Switzerland, New Zealand and the United States.

Source:

OECD,

National Accounts Database.

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aggregate economy, for instance by focusing on the non-primary business sector (as done

in OECD, 2012) while others have also excluded the self-employed (as done in

Karabarbounis and Neiman, 2014). The current findings may mask compositional effects

arising from cross-industry differences as well as workers’ reallocation between industries.

As a result, the aggregate approach needs to be complemented with a finer industry-level

approach in future work.

The household capital income share of GDP

Capital represents a smaller source of overall income than labour for the average

household, but this this income source is far from negligible and highly variable across

countries (Figure 3.2).

Since capital is ultimately held by households, developments in

economy-wide capital income over the last decades should have ultimately trickled down

to the household sector.

This section provides a preliminary exploration of developments

in capital income for the average household with a view to shedding light on this issue.

Before doing so, it is useful to remind the SNA definition of household capital income. Such

income covers the three following items:

●

Household operating surplus:

this item corresponds to income from housing services, that

is, actual and “imputed” rents. In countries where homeownership is dominant such as

France and Italy, most output in the housing sector is recorded as imputed rent paid by

homeowners to themselves and this item amounts to around 10% of household adjusted

disposable income per capita.

Capital income of the self-employed:

this item corresponds to the remuneration of capital for

unincorporated enterprises, which are included in the household sector alongside “real”

households. The national accounts do not generally allow for distinguishing between

income from capital and labour for the self-employed, and the sum of the two is

therefore called “mixed income”. The split between the remuneration of labour and that

of capital needs to be imputed, as explained in Box 3.3. The resulting capital income

share is highly heterogeneous across countries, between 2.5% and 20% of adjusted

household disposable income per capita, not least reflecting the heterogeneous

incidence of self-employment.

Property income:

this item corresponds to the returns on households’ financial

investments (interest, dividends, and imputed interests from life insurance policies). It

represents a smaller part of household income per capita compared to other capital

income components and may not deliver a comprehensive assessment of returns to

financial capital, reflecting the following limitations: i) it excludes capital gains and

losses, whether realised or unrealised, and ii) as a result, it excludes capital gains from

share buy-backs, yet such corporate profits redistribution mechanism to shareholders

has been on the rise relative to dividend pay-out and iii) in some countries such as

Germany and Italy it includes self-employment income accruing to a very substantial

group of small individual firms.

The latter limitation has been shown to affect foremost

cross-country level comparisons, leaving trend comparisons largely unaffected.

●

Proper measurement of the capital income share ideally requires taking into account

capital depreciation. The increasing share of fast-depreciating capital, notably intangible

and knowledge-based capital (KBC) in all OECD countries implies an increase in the

average depreciation rate of the overall capital stock (Andrews and Criuscolo, 2013). Experts

generally assume a depreciation rate around 15% for intangible capital, which is much

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higher than the depreciation rate applied to tangible capital, although this is a new area of

research which implies that any such estimate is surrounded by uncertainty. Even without

formally taking into account KBC, recent empirical findings based on a sample of G7

countries suggest that trend rise in the capital income share is less pronounced when

measured in net terms, reflecting increasing depreciation rates (Rognlie, 2015).

In practice however, methods for calculating consumption of fixed capital are complex

and tend to differ between countries, thus creating doubts about the comparability of

results. In addition, depreciation data are only available for a subset of countries in the

SNA. As a result of these issues, this chapter presents both gross and net capital income

shares. While the net concept is more appropriate in theory, results should be interpreted

with care, reflecting comparability and measurement issues.

According to SNA data, the household capital income share of GDP (i.e. the ratio of

capital income accruing to the household sector over GDP) has declined in the vast

majority of OECD countries since the mid-90s (Figure 3.8).

The average decline of 2.5

percentage points masks cross-country differences in magnitude: from more than 12

percentage points in Italy to around 1 percentage point in France. The decline in property

income may partly reflect declining interest payments on government debt held by

households, as suggested by the sharper decline observed in Italy and Belgium, since in

these countries bonds and other debt securities represent a higher proportion of household

financial assets compared to the rest of the OECD.

Portugal and the United States are

among the few countries experiencing a rise in the household capital income share and

they are also among the countries experiencing a marked decline in the labour share. This

Figure 3.8.

The evolution of the household capital income share of GDP and its components

Nominal terms, percentage points, 1995-2013

-2

-4

-6

-8

-10

-12

-14

ITA

Household operating surplus

Gross household capital income, total

Property income

Net household capital income

Capital income of the self-employed

-2

Average (gross household capital income)

-4

-6

-8

-10

-12

BEL HUN CZE

IRL

NLD GBR DNK CHE SVN AUT ESP FRA

JPN DEU

FIN

SWE USA PRT SVK

-14

1. The household capital income share is defined as the sum of household operating surplus, capital income of the self-employed and

property income, over GDP. Capital income of the self-employed is imputed by the difference between their mixed income and their

labour income, assuming that their annual wage is the same as for the average employee of the whole economy. GDP and household

capital income are expressed in current prices. Net capital income is obtained by subtracting households’ consumption of fixed

capital from gross capital income. For 1995, data refer to 1998 for the United States; 1999 for Spain, the United Kingdom, Hungary,

Ireland and New Zealand. For 2013, data refer to 2014 for Czech Republic, Finland, Italy, Korea, the Netherlands, Portugal, Sweden;

2012 for Switzerland, New Zealand and the United States.

Source:

OECD,

National Accounts Database.

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could suggest a shift in the functional income distribution. Nevertheless, a number of

countries experienced a decline in the household capital income share amid stability

(e.g. United Kingdom) or decline (e.g. Austria) in the labour share.

Income from housing services has been the only component of household capital

income not falling relative to GDP. This corresponds to rental income, most of which is

imputed in the national accounts on the grounds of owner-occupied housing. This finding

echoes recent work by Rognlie (2015) as well as Bonnet et al. (2014) who show that the trend

rise in the capital share of GDP has been driven by the housing sector.

This could mitigate

the adverse distributional consequences of rising capital incomes, because housing is

more equitably distribut ed than other capital assets (i.e. financial assets), as recently

shown in OECD (2015b).

The role of housing cannot be properly addressed through SNA

data, due to cross-country differences in the methodology applied for imputing owner-

occupied rents (Box 3.1).

Parallel declines in labour and household capital income shares of GDP could suggest

that a rising share of primary income has been retained by the corporate sector. This would

be consistent with Karabarbounis and Neiman (2014) who show that the decline of the

labour share has been the counterpart of a concomitant increase in corporate savings.

Nevertheless, the findings reported in this chapter provide a more complex picture:

widespread declines in the household capital income share have coincided with mixed

developments in the labour share (i.e. increases in some countries, declines in others). The

decline in household capital income could nevertheless be overestimated in the current

analysis if the nature of capital income has been changing towards forms of remuneration

that are not covered by the SNA. This notably applies to realised capital gains, as discussed

before, including share buy-backs, which have been increasingly used by corporations as a

way to redistribute profits to shareholders. Assessing developments in household capital

income in association with developments in corporate profit distribution and savings

behaviour is also an important area for future research.

The household secondary income share of GDP

Developments in the household income share of GDP may also reflect income flows

between the household and the government sector. Indeed, so far the analysis has focused

on household primary income, that is, income from labour and capital. This needs to be

complemented with an analysis of household secondary income, that is, income that the

government redistributes in cash or in-kind to households, net of the current taxes on

income and wealth paid by households (see Figures 3.1 and 3.2).

Secondary household income shares of GDP have been rising in many countries

(Figure 3.9, Panel A). This finding should be qualified: it largely reflects higher social

transfers and lower taxes during the crisis period (Figure 3.9, Panels B and C), which have

cushioned household disposable incomes from the falls in GDP and market income. Apart

from the crisis period, cross-country trends have been heterogeneous, with around one

third of countries experiencing declines of more than 2 percentage points, another third

facing rises of more than 2 percentage points, and the rest seeing relative stability in the

share of household secondary income in GDP (Figure 3.9). All in all, income redistributed by

the government does not appear as a major long-term driver of disposable income for the

average household, but rather as a key income stabiliser over the economic cycle, which is

broadly consistent with priors on the cushioning role of the welfare state.

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Figure 3.9.

The evolution of the household secondary income share of GDP

Nominal terms, percentage points, 1995-2013

A. 1995-2013

-2

-4

SWE AUT DEU FRA KOR DNK PRT CZE CHE HUN NLD BEL

FIN

SVN ESP

ITA

IRL

GBR SVK USA JPN

Average

-2

-4

B. 1995-2007

Average

-2

-4

-6

-2

-4

-6

SWE FIN

DNK ESP AUT CZE KOR GBR FRA HUN SVN BEL DEU PRT

IRL

CHE USA NLD

ITA

SVK JPN

C. 2007-13

-1

DEU PRT NLD CHE FRA KOR AUT BEL SVK HUN

ITA

CZE SWE JPN SVN

IRL

DNK USA GBR

FIN

ESP

Average

-1

1. The household secondary income share is defined as the sum of the net social benefits, transfers, and social transfers in-kind

received by households, minus current taxes on income, wealth, etc. over GDP. The household secondary income share is defined as

the ratio of household secondary income over GDP. GDP and household secondary income are expressed in current prices. For 1995,

data refer to 1998 for the United States; 1999 for Spain, the United Kingdom, Hungary, Ireland and New Zealand. For 2013, data refer

to 2014 for Czech Republic, Finland, Italy, Korea, the Netherlands, Portugal, Sweden; 2012 for Switzerland, New Zealand and the

United States.

Source:

OECD,

National Accounts Database.

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http://dx.doi.org/10.1787/888933324062

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The finding of an increase in income redistributed from governments to households could

also be overestimated to the extent that consumption taxes are excluded from taxes paid by

households in the SNA framework, as emphasised above. Yet across high-income countries

the recent period has been characterised by a trend shift in the tax structure towards

consumption taxes,

which is likely to have reduced the purchasing power of household

incomes. Indeed, this is in line with the findings reported in the first section of this chapter,

that is, a decline in real household incomes, when nominal household income is deflated with

consumer prices, as those have increased in many countries relative to output prices.

A Wrap-up on the household income share of GDP

To wrap-up, the changes in the household income share of GDP presented at the

beginning of this chapter can be decomposed as changes in the labour share of GDP, in the

household capital income share of GDP, and in the household secondary income share of

GDP (Figure 3.10). This summary decomposition delivers the following broad conclusions:

●

Over the period 1995-2013, declines in the household income share of GDP were in most

cases largely driven by declines in the household capital income share of GDP while

increases were driven by increases in the household secondary income share of GDP. The

contribution of labour income was heterogeneous across countries, but generally of

lower magnitude (Figure 3.10, Panel A).

The relative contribution of labour, household capital and household secondary income

shares partly reflects the cushioning role of secondary income redistributed by

governments at the onset of the crisis (Figure 3.10, Panels B and C). Indeed, most

OECD countries experienced declines in the household income share of GDP over the

pre-crisis period; this was driven by declines in primary incomes, in particular by

declines in the household capital income share but also, though to a lesser extent, by

declines in the labour share. Such declines were not generally compensated by increases

in household secondary income shares of GDP, in contrast with the crisis period.

●

From functional income distribution to income inequality

Functional income distribution, which can be defined as the division of income

between labour and capital, is often expected to explain income inequality. However, the

link is not a simple one whereby income is divided into workers receiving only wages and

capitalists or landlords receiving only profits and rents. First, most people have multiple

sources of income, notably from labour and from capital; second, there is considerable

inequality within each category of income, notably within labour and capital income. Even

if there were only two types of income, wage and capital, the effect on income inequality

of changes in the functional income distribution would depend on the degree of correlation

between wage and capital income and on the relative dispersion between the two income

sources.

Market income

Empirically, declines in the labour share have been associated with widening market-

income inequalities,

even though the correlation is not very high and a number of

countries have experienced increases in both labour shares

and

inequality of market

incomes (Figure 3.11). The association is even weaker for household capital income.

Developments in the household capital income share reveal nothing on market-income

inequality, as most OECD countries have experienced declines in household capital income

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Figure 3.10.

Decomposing the changes in the household income share of GDP

Nominal terms, percentage points

Labour share of GDP

-2

-4

-6

-8

-10

-12

Capital income share of GDP

Secondary income share of GDP

Household income share of GDP

-2

-4

-6

-8

-10

-12

A. 1995-2013

AUT

BEL

ITA

HUN PRT NLD CZE SVN DNK CHE DEU ESP FRA GBR

IRL

SWE JPN

FIN

USA SVK

B. 1995-2007

-2

-4

-6

-8

SVN

BEL DNK AUT CZE

FIN

ESP NLD SWE

ITA

HUN PRT DEU JPN CHE

IRL

GBR FRA USA SVK

-2

-4

-6

-8

C. 2007-13

-2

-4

-6

-8

AUT HUN

ITA

PRT CHE FRA DEU BEL

NLD CZE GBR SVK

IRL

USA SVN ESP

JPN DNK SWE

FIN

-2

-4

-6

-8

1. See Figures 3.7 to 3.9 for the definition of respectively the labour share, the household capital income share (gross terms), and the

household secondary income share. GDP and the various components are expressed in current prices. For 2013, data refer to 2014 for

Czech Republic, Denmark, Finland, Italy, the Netherlands, Portugal and Sweden; 2012 for New Zealand and Switzerland. For Chile and

Korea, the component “Operating surplus” includes mixed income. For panel C, 1999 instead of 1995 for Hungary, Ireland, Spain, the

United Kingdom and New Zealand and 1998 for the United States.

Source:

OECD,

National Accounts Database.

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Figure 3.11.

Developments in the labour share and in market income inequality¹

Nominal terms, percentage points, 1995-2012

Change in the Gini coefficient for household market income

JPN

-2

-4

-6

-8

-5

-4

-3

-2

-1

SVN

AUT

DEU

PRT

USA

KOR

CHE

SVK

NLD

ESP

GBR

IRL

FRA

DNK

ITA

Correlation coefficient = -0.36

CZE

FIN

SWE

BEL

NZL

-2

-4

-6

-8

Change in the labour share

1. See Figure 3.7 for a definition of the labour share. Inequality is measured by the Gini index coefficient for pre-tax and transfer income

(market income). The values of the Gini coefficient range between 0, in the case of “perfect equality” (i.e. each share of the population

gets the same share of income), and 1, in the case of “perfect inequality” (i.e. all income goes to the individual with the highest income).

For 1995, data refer to 1998 for the United States, 1999 for Hungary, Ireland, Spain, New Zealand and the United Kingdom. For 2012, data

refer to 2011 for Canada, Denmark, France, Germany, Japan, the United Kingdom, New Zealand, Switzerland and Sweden.

Source:

OECD,

National Accounts and Income Distribution Databases.

1 2

http://dx.doi.org/10.1787/888933333811

shares and increases in inequality of market incomes (Figure 3.12). This is likely to reflect

measurement limitations associated with household capital income, such as the non-

recording of capital gains in national accounts. Measurement limitations also apply to Gini

coefficients. Generally computed on household surveys, they tend to under-estimate top

incomes and thus the dispersion of capital incomes.

Figure 3.12.

Developments in the household capital income share

and in market income inequality

Nominal terms, percentage points, 1995-2012

Change in the Gini coefficient for household market income

-2

-4

-6

-8

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

Change in the household capital income share

NLD

SVK

BEL

DNK

CHE

GBR

ITA

CZE

SVN

PRT

Correlation coefficient = 0.02

IRL

ESP

FRA

AUT

FIN

SWE

DEU

USA

JPN

-2

-4

-6

-8

1. See Figure 3.8 for a definition of the household capital income share and Figure 3.11 for the Gini index. For 1995, data refer to 1998 for

the United States, 1999 for Hungary, Ireland, Spain, New Zealand and the United Kingdom. For 2012, data refer to 2011 for Canada,

Denmark, France, Germany, Japan, the United Kingdom, New Zealand, Switzerland and Sweden.

Source:

OECD,

National Accounts and Income Distribution Databases.

1 2

http://dx.doi.org/10.1787/888933333824

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

Secondary or redistribution income allows for moving from market income to

disposable income, i.e. market income net of current income taxes paid and transfers

received by households from the government. The association between developments in

the household secondary income share of GDP and in inequality of household disposable

income is negative and relatively strong (Figure 3.13, Panel A). Redistribution income is

indeed meant to reduce the impact of market income inequality on disposable income

inequality. Nevertheless, the redistributive effect of taxes and transfers is heterogeneous

across OECD countries: for a given rise in secondary income accruing to the average

household, countries are more (e.g. Portugal) or less (the Netherlands) successful at

moderating the transmission from market income inequality to disposable income

inequality (Figure 3.13, panel B).

Figure 3.13.

Developments in the household secondary income share and in income inequality

Nominal terms, percentage points, 1995-2012

A. Developments in the household secondary income share and

in disposable income inequality

Change in the Gini coefficient for household disposable income

-2

-4

-6

-3

-2

-1

Change in the household secondary income share

AUT

CZE

CHE

SWE

FRA

FIN

DNK

ESP

GBR

SVN

HUN

BEL NLD

PRT

ITA

SVK

Correlation coefficient = -0.41

USA

JPN

IRL

-2

-4

-6

DEU

Change in the extent of redistribution

SWE

AUT

-2

-4

-6

-8

-10

-12

-14

-3

-2

-1

B. Developments in the household secondary income share and

in the extent of redistribution

Correlation coefficient = -0.63

FIN

DNK

NLD

FRA

DEU

CZE

CHE

BEL

PRT

SVN GBR

ESP

ITA

IRL

JPN

Change in the household secondary income share

SVK

USA

-2

-4

-6

-8

-10

-12

-14

1. See Figure 3.9 for a definition of household secondary income share and Figure 3.11 for the Gini index. The extent of redistribution is

defined as the difference between the Gini coefficients for disposable and market income, relative to the value of the Gini coefficient

for market income. It is measured in terms of the change over the period 1995- 2012. For 1995, data refer to 1998 for the United States,

1999 for Hungary, Ireland, Spain, New Zealand and the United Kingdom. For 2012, data refer to 2011 for Canada, Denmark, France,

Germany, Japan, the United Kingdom, New Zealand, Switzerland and Sweden.

Source:

OECD,

National Accounts and Income Distribution Databases.

1 2

http://dx.doi.org/10.1787/888933333836

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

A Wrap-up on income distribution

Wrapping-up on the different components of household income, i.e. labour, capital

and secondary income, changes in the overall household income share of GDP are

positively but weakly correlated with changes in disposable income inequality

(Figure 3.14). This would imply that as the household sector receives a larger share of GDP,

income dispersion across the household sector increases, a somewhat counter-intuitive

finding. This is more likely to reflect that income distribution between the household and

non-household sectors of the economy has little information value about income

distribution within the household sector, as it largely ignores the major drivers of

dispersion at the level of market incomes: inequality between workers and non-workers

and inequality among workers, as well as taxes and transfers as a major source of income

and a redistributive tool to mitigate market income inequality.

Figure 3.14.

Wrapping-up: developments in the household income share

and in disposable income inequality

Nominal terms, percentage points, 1995-2012

Change in the Gini coefficient

SWE

ITA

-2

BEL

-4

-6

-5

-4

-3

-2

-1

Change in the household income share

NLD

HUN

CHE

PRT

AUT

DNK

DEU

SVN

CZE

ESP

GBR

IRL

SVK

FRA

JPN

FIN

USA

Correlation coefficient = 0.21

-2

-4

-6

1. Household income and Gross domestic product (GDP) are expressed in current prices. Inequality is measured by the Gini coefficient

for post-tax and transfer income (disposable income). See Figure 3.11 for a definition of the Gini index. For 1995, data refer to 1998 for

the United States, 1999 for Hungary, Ireland, Spain, New Zealand and the United Kingdom. For 2012, data refer to 2011 for Canada,

Denmark, France, Germany, Japan, the United Kingdom, New Zealand, Switzerland and Sweden.

Source:

OECD,

National Accounts and Income Distribution Databases.

1 2

http://dx.doi.org/10.1787/888933333848

Notes

1. Stiglitz et al. (2009), Atkinson, (2012, 2015), OECD, (2008), (2011a), (2011b), (2015),

OECD Better Life

Initiative, OECD Inclusive Growth Initiative,

Piketty (2013), Causa et al. (2014a, 2014b).

2. See also Atkinson, (2012), OECD, (2011a),

OECD Better Life Initiative, OECD Inclusive Growth Initiative,

Causa et al. (2014a).

3. Empirical evidence on income distribution and on the influence of growth-oriented policies on

income distribution is relatively rich. See Causa et al. (2014a, 2014b), OECD, (2011b), Braconier and

Ruiz-Valenzuela (2014), Fournier and Koske, (2012), Joumard et al. (2012), Koske et al. (2012),

Jaumotte and Osorio Buitron (2015). This has allowed for progressively incorporating income

inequality among the objectives of policymaking, for instance among the policy recommendations

formulated in

Going for Growth

reports.

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4. This paper relies on a comprehensive use of the SNA and its guide (Lequiller and Blades, 2014). The

SNA defines six institutional sectors: households (S14); non-financial corporations (S11); financial

corporations (S12); general government (S13); non-profit institutions serving households (S15); and

the rest of the world (S2).

5. An estimate of income derived from the underground (or hidden) economy is included in the SNA

and represents a large share of GDP in many countries (for example around 11% in Spain). See

Lequiller and Blades (2014). Household income in the SNA consistently includes income derived

from hidden activities. The majority of hidden activities are related to small enterprises. As a

consequence, the main part of the adjustment ends up in output and value added of households

(for example in self-employment income).

6. See Atkinson (2009) and (2012) for a discussion and the definition of “spendable income”.

7. Consumption of fixed capital is defined as the reduction in the value of the fixed assets used in

production. At the household level, the most important fixed asset is usually housing. Under the

SNA framework, consumption of fixed capital is estimated by applying a depreciation rate to the

current value of each capital asset,

i.e.

its current market price. The depreciation rate varies across

countries and depends on the assumption about assets’ service lives (i.e., how long the asset is

assumed to be used; for example in the United States it is assumed that the service life of a

dwelling is 80 years). Depreciation functions may be geometric (US assumption for dwellings) or

linear. On average across OECD countries for which data are available, consumption of fixed capital

represents 5% of net adjusted household disposable income.

8. There are well-known measurement issues in the estimation of households’ consumption of fixed

capital, suggesting that gross adjusted disposable income may be more appropriate for cross-

country comparison purposes. The correlation between them is close to one (0.99).

9. Self – employment income corresponds to the SNA item “mixed income”: so-called because this

category includes both the remuneration of labour and that of capital.

10. This pattern is in line with recent OECD work on inequality trends during the crisis, where it is

shown that taxes and social transfers alleviated the effects on disposable incomes of falling

market incomes during the crisis (OECD, 2013c).

11. Many OECD countries have been raising their standard VAT rate, in particular between 2009

and 2014. The OECD average standard VAT rate reached 19.1% in January 2014, from 17.6% in January

2009. Ten OECD countries now have a standard rate above 22% versus four in 2009. See OECD (2014).

12. For example, household income includes -- while GDP excludes -- the wages and salaries of

workers who are resident in a country but working in neighbouring countries; conversely,

household income excludes, while GDP includes, the wages and salaries of workers who are

non-resident of a country where they have come to work.

13. GNI is not affected by the activity of multinationals and therefore the allocation of value added and

profits across countries. In the SNA, all profits end up in the country of residence of the

multinational, via the item “reinvested earnings on foreign direct investment” in the business

accounts: see Chapter 7 in Lequiller and Blades, (2014).

14. The same diagnosis applies to the household income share of GNI (not shown).

15. This finding confirms earlier results by Causa et al. (2014b).

16. See Causa et al. (2014b) for a discussion.

17. For instance companies may defer cash dividends distribution because the cyclical or institutional

context makes it more attractive to accumulate cash or retain earnings for investment purposes.

The part of household capital income that accrues in the form of capital gains is

de facto

excluded

from the SNA.

18. See OECD, (2012) for a recent in-depth assessment and policy analysis., see also

inter alia

Arpaia

et al. (2009); Azmat et al. (2012), Bentolila and Saint-Paul (2003), Checchi and Garcia-Penalosa,

(2008, 2010), De Serres at al. (2002), Elsby et al. (2013), European Commission, (2007), Frydman and

Saks, (2010), Harrison, (2002), Jaumotte and Tytell, (2007); more recent papers have analysed the

concomitant rise in the capital share: see Karabarbounis and Neiman (2014), Piketty (2013), Piketty

and Zucman (2014), Rognlie (2015).

19. Trend rises in the aggregate capital share of GDP among high-income countries since the post war

area have been documented and received growing attention among researchers and policymakers,

not least reflecting associated inequality implications (Piketty, 2013). See Karabarbounis and

Neiman (2014), Piketty (2013), Piketty and Zucman (2014), Rognlie (2015). The most recent period is

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however characterized by a marked decline in the investment rate hence in capital per worker as

discussed for instance in Chapter 3 of OECD (2015a). The impact on the functional income

distribution is likely to depend on number of factors such as substitutability between capital and

labour. The impact on the household capital income share is likely to materialize with a lag and

will depend on companies’ profits and their redistribution strategies.

20. Capital income of general government is null by construction, because the output of the general

government sector consists of non-market output and is valued “at cost”, meaning that value

added is equal to labour costs (i.e. compensation of civil servants, which is included in the

aggregate labour share).

21. In Italy, unincorporated enterprises with more than five employees are considered as “quasi-

corporations” and are therefore classified in the corporate sector. This implies an overestimation

of the profit share hence an underestimation of the labour share. See Guidetti and Pionnier, (2015)

for a detailed assessment.

22. This conclusion is based on findings reported in Guidetti and Pionnier (2015).

23. These results pre-date the crisis: similar conclusions are reached for the period 1995-2013.

24. OECD (2015b), Chapter 6.

25. The finding of positive effects from housing assets is also emphasized in recent OECD work on

household wealth: OECD (2015b) shows that rising house prices have been a key factor leading to

higher household wealth in some OECD countries such as Australia, Belgium, Canada, Spain and

the UK. In the SNA, the household income account does not allow for directly capturing capital

gains associated with rising house prices – unless indirectly reflected in rising actual and imputed

rents.

26. This argument remains tentative since the National Accounts data do not cover the income

distribution. See OECD (2015b), Chapter 6 for a recent focus on household wealth and its

distribution.

27. The authors develop a model-based explanation for these trends: that is, a global decline in the

cost of capital, which has induced firms to shift away from labour and towards capital, financed in

part by an increase in corporate savings.

28. OECD (2014).

29. The higher the dispersion of capital relative to labour income and the higher the correlation

between the two income sources, the most likely will the decline in labour share result in higher

inequality.

30. See OECD (2012), Checchi and Garcia Penalosa (2008, 2010).

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APPENDIX 3.1

Policy drivers of the labour share: a brief literature

overview

Declines in the labour share have been documented over the past decades, even

though the magnitude of such a decline has been the object of controversies.

A wide array

of research has investigated the drivers of this trend, focusing in particular on the role of

globalisation along with that of changing policies and institutions. The main conclusions

from this literature can be summarised as follows:

●

Empirical evidence has pointed to negative effects of technical change and skill-biased

technical change embodied in ICT capital on the labour share, reflecting extensive

automation of production and substitution between capital and labour.

❖

Technical change is becoming disembodied to the extent that it reflects the

accumulation of knowledge-based capital (KBC, including output from R&D, better

management, etc.). This also favours high-skilled workers, for instance because the

accumulation of KBC reflects productive improvements associated with highly-

qualified personnel.

❖

However, disembodied technical change and the rising share of KBC have uncertain

effects on the aggregate labour share. First, in net as opposed to gross terms, the

process is not necessarily capital-augmenting once the higher depreciation rates for

KBC are accounted for; second, the process is likely to exacerbate wage inequality

between low- and high-skilled workers, reducing the labour share of the low-skilled

relative to that of the high-skilled, with ambiguous aggregate effects.

●

Evidence on the effect of globalisation on the labour share is not clear cut. Foreign

competition may reduce the bargaining power of workers in exposed industries, which

would not nevertheless necessarily imply a decline in the aggregate labour share. This is

likely to reflect the aggregate interplay between multiple confounding channels and

factors, such as differences in trade-induced reallocation between high and low-labour

share industries and differential effects between high and low-skilled workers.

Robust

findings for advanced countries can be summarised as follows (OECD, 2012, Bassanini

and Manfredi, 2012):

❖

Rising offshoring of intermediate stages of production tends to reduce the labour share.

❖

Competition from foreign firms in domestic market induces structural changes that

have different effects on the aggregate labour share, that is: i) greater import

penetration prompts reallocation of resources away from affected industries and

towards either domestic industries or countries with lower labour costs; and ii) growth

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of import penetration appears more important in industries that are typically

characterised by a high labour share. The resulting larger trade-induced reallocation

away from these industries contributes to reduce the aggregate labour share, although

available evidence points to a small effect.

5, 6

●

Evidence on product market liberalisation pertains to the network industries, as most

reforms have been taking place in these industries during the 1990s.

❖

Privatisation of SOEs tends to reduce the labour share within liberalised industries and

as a result the aggregate labour share.

❖

Reductions in barriers to entry have no significant effect on the labour share. This is

likely to reflect the interplay between counter-balancing effects of pro-competitive

reforms: i) on the one hand, these reforms may erode firms’ rents and squeeze profits

hence increase the labour share;

ii) on the other hand, these reforms may erode the

bargaining power of the average worker hence reduce the labour share.

●

Available studies have been largely silent on reform-driven price effects and associated

effects on the labour share. Workers generally benefit from increased competition in the

form of gains in real wages. For example, trade liberalisation reforms that reduce

barriers to import competition should reduce consumption prices relative to GDP prices.

The descriptive analysis reported in this chapter suggests that relative price effects have

a large impact on real household developments. Proper identification of reform-driven

relative price developments is a challenging task for future research.

Empirical evidence on the effects of labour market policies on labour shares is mixed.

This probably reflects the differential effects across categories of workers, such as across

low and high-skilled workers (European Commission, 2007).

The main conclusions can

be summarised as follows:

❖

Trends in the labour share cannot be strictly related to the nature of collective

bargaining or to its evolution (OECD, 2012).

This likely reflects the important and

confounding role of globalisation, increased competition and financial liberalisation,

which have: i) reduced the collective bargaining power of workers across the board,

that is, irrespective of wage bargaining regimes, and ii) at the same time, catalysed

wage bargaining reforms towards either more decentralisation or more centralisation

and co-ordination,

ultimately delivering wage moderation.

❖

Increases in the statutory minimum wage relative to the median tend to reduce the

labour share, but the quantitative effect is estimated to be very small (OECD, 2012).

This could reflect that firms are induced to invest in labour-saving innovation

prompted by the need to contain the rise in labour costs. This finding would suggest

that large increases in minimum wage could reduce the labour share, even though

such increases might reduce wage inequality in the lower-half of the wage distribution

and in-work poverty. Indeed, empirical evidence based on European countries

suggests that higher minimum wages increase low-skilled labour shares and reduce

medium-skilled labour shares, resulting in a small negative effect at the aggregate

level (European Commission, 2007).

❖

Stepping-up job search support and active labour market policies (ALMPs) while

reducing the generosity of unemployment benefits has been found to increase the

labour share of low-skilled workers across European countries (European

Commission, 2007). Well-designed and targeted activation and training policies

primarily induce an increase in employment of low-skilled workers, who are

●

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overrepresented among the pool of unemployed. The evidence suggests that this

compensates any potential moderating effect on wages. The overall effect of higher

spending on ALMP on the aggregate labour share has been found insignificant,

reflecting a negative effect on the labour share of medium-skilled workers by contrast

to the effect on low-skilled workers; while that of higher UB replacement rates has

been found negative, reflecting a concomitant negative effect on the labour share of

low and medium-skilled workers.

❖

Relaxing job protection has not been found to trigger any significant change in the

aggregate labour share, even though it has been found to boost aggregate productivity

growth. This neutrality may reflect the interplay of differential effects of job protection

between industries and workers. Empirical evidence based on European countries

suggests that stricter job protection increases high-skilled labour shares and reduces

medium-skilled labour shares, resulting in a small negative effect at the aggregate

level (European Commission, 2007). Non-standard employment has become the

predominant source of job creation in many OECD countries since the mid-nineties

(OECD, 2015, Chapter 4). More recent forms of non-standard employment such as on-

call work, subcontracted work and zero-hours contracts in e.g. the United Kingdom

and the United States certainly favour hiring flexibility for firms and in principle also

for workers who need it. However, in practice, for workers, they have been associated

with more wage variability and reduced firms’ obligations to ensure standard benefits

and protection; as well as with low career and training opportunities. Policy changes

of this type may reduce workers’ bargaining power and as a result, their wages,

especially for those with low skills.

●

The high growth of the financial sector has also been highlighted as a potential cause of

declining labour shares, even though direct empirical evidence is scarce.

The

deregulation of financial markets may have lowered workers’ bargaining power by

pressuring firms to reduce costs; hence to focus on core activities while sub-contracting

labour-intensive activities in order to reduce debt while at the same time generate high

short-term profits.

Notes

1. See OECD, (2012) for a recent in-depth assessment and policy analysis., see also

inter alia

Arpaia

et al. (2009); Azmat et al. (2012), Bentolila and Saint-Paul (2003), Checchi and Garcia-Penalosa,

(2008, 2010), De Serres at al. (2002), Elsby et al. (2013), European Commission, (2007), Frydman and

Saks, (2010), Harrison, (2002), Jaumotte and Tytell, (2007); more recent papers have analysed the

concomitant rise in the capital share: see Karabarbounis and Neiman (2014), Piketty (2013), Piketty

and Zucman (2014), Rognlie (2015).

2. Karabarbounis and Neiman (2014), Koh et al. (2015), OECD (2012), Arpaia et al. (2009), European

Commission (2007), Jaumotte and Tytell (2007).

3. This reflects differences in substitutability between capital and low skilled as opposed to high

skilled labour, because different degree of substitutability between capital and labour have

different implications on the effect on the labour share of a change in the relative price of labour.

When the elasticity of substitution between capital and labour is smaller than 1, the labour share

will increase if the capital-labour ratio increases. In this context, the price effect will dominate the

quantity effect. This implies that a reduction in workers’ bargaining power leading to a decline in

the real wage will reduce the labour share if the elasticity of substitution between labour and

capital is smaller than 1. Given that it is generally assumed that high skilled labour is

complementary to capital while low skilled labour is substitutable to capital, capital deepening can

increase the labour share of high skilled workers and reduce the labour share of low skilled

workers.

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3. FROM GDP TO AVERAGE HOUSEHOLD INCOME: A LOOK AT THE TRANSMISSION CHANNELS

4. See OECD (2012) for a discussion.

5. The finding of a small reallocation effect is in line with that of the documented negligible role of

reallocation in explaining changes in the aggregate labour share. See Bassanini and Manfredi

(2012).

6. European Commission (2007) finds a negative effect of openness on the labour share of medium-

skilled workers, and this drives a negative effect at the aggregate level.

7. This is the well-known prediction of a standard theoretical model with homogenous firms and

workers (Blanchard and Giavazzi, 2003).

8. Again, this is due to differences in the elasticity of substitution between capital and different types

of labour (e.g. low and high skilled). Reform effects are also likely to depend on the elasticity of

substitution in industries most affected by the reforms.

9. European Commission (2007) finds a negative effect of union density on the labour share of low-

skilled workers and a positive effect on the labour share of high-skilled workers. The authors

interpret this along the lines of complementarity between high-skilled work and capital and

substitutability between low-skilled work and capital. Union density is however a very crude and

partial measure which in isolation falls short of capturing the nature of wage bargaining.

10. Such pro-decentralisation reforms have largely aimed at increasing the flexibility to negotiate at

firm level. See OECD (2012) for an in-depth qualitative discussion of wage bargaining reforms.

11. See Box 3.5 in OECD (2012) for a summary of empirical studies on globalisation and increased

competition on workers’ bargaining power.

12. OECD (2012), ILO (2012).

ECONOMIC POLICY REFORMS 2016: GOING FOR GROWTH INTERIM REPORT © OECD 2016

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Economic Policy Reforms 2016

Going for Growth Interim Report

Chapter 4

Structural policy indicators

This chapter contains a comprehensive set of quantitative indicators that allow for

a comparison of policy settings across countries. The indicators cover areas of

taxation and income support systems and how they affect work incentives, as well

as product and labour market regulations, education and training, trade and

investment rules and innovation policies. The indicators are presented in the form of

figures showing for all countries the most recent available observation and the

change relative to the previous observation.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli

authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights,

East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

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4. STRUCTURAL POLICY INDICATORS

Figure 4.1.

Cost of labour

A. Minimum wages

As a percentage of median wage

100

JPN

ESP

SVN

MEX

GBR

USA

CZE

HUN

RUS

CAN

NLD

CHN

AUS

KOR

GRC

BRA

EST

FRA

TUR

LUX

IND

SVK

LVA

IDN

ISR

OECD

COL

TUR

PRT

POL

CHL

BEL

IRL

NZL

2014

2009

100

B. Minimum cost of labour

As a percentage of labour cost of median worker

100

JPN

IRL

GBR

CZE

USA

CAN

KOR

NLD

ESP

GRC

SVK

EST

BEL

ISR

OECD

HUN

SVN

FRA

AUS

LUX

PRT

CHL

POL

NZL

2014

2009

100

1. Missing countries do not have a national statutory minimum wage except for Mexico. Data refer to 2004-05 and 2009-10 for India; 2013

for Colombia.

2. Exactly half of all workers have wages either below or above the median wage for the OECD countries. Percentage of minimum to

average wage for China, Indonesia, the Russian Federation and India.

3. The cost of labour is the sum of the wage level and the corresponding social security contribution paid by employers.

Source:

Panel A: OECD,

OECD Employment Outlook Database;

China Ministry of Human Resources and Social Security, National Bureau of

Statistics;

Instituto Brasileiro de Geografia e Estatística (Pesquisa Nacional por Amostra de Domicílios); International Labour Organisation

(ILO)

Database on Conditions of Work and Employment Laws;

Ministry of Man Power and Transmigration of the Republic of Indonesia and Statistics

Indonesia (BPS); Russia Federal State Statistics Service and Rani, U., P. Belser, M. Oelz and S. Ranjbar (2013), “Minimum wage coverage and

compliance in developing countries”

International Labour Review,

Vol 152, No.3-4; Panel B: OECD,

OECD Employment Outlook

and

Taxing Wages

Databases.

1 2

http://dx.doi.org/10.1787/888933324086

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STRUCTURAL POLICY INDICATORS

Figure 4.2.

Net income replacement rates for unemployment

Net income when unemployed as a percentage of net income when working

A. Initial²

100

GRC

KOR

TUR

AUS

USA

NZL

EST

CHL

GBR

HUN

SVK

SWE

FRA

POL

OECD

ESP

AUT

ITA

DEU

CZE

CAN

NOR

IRL

ISL

FIN

PRT

BEL

JPN

NLD

CHE

SVN

DNK

ISR

LUX

LVA

2013

2008

100

B. 60th month³

100

ITA

TUR

CHL

GRC

USA

HUN

PRT

ESP

SVK

KOR

EST

ISR

CAN

OECD

POL

AUS

FRA

NZL

CZE

BEL

SVN

DEU

SWE

GBR

NOR

CHE

NLD

DNK

ISL

LUX

AUT

FIN

IRL

JPN

2013

2008

100

1. Simple average of the net replacement rates for the following households situations: single with no child and with two children at 67%

and 100% AW, one-earner married couple with no child and with two children at 67% AW and 100% AW. After tax and including

unemployment and family benefits. Social assistance and other means-tested benefits are assumed to be available subject to relevant

income conditions. Housing costs are assumed equal to 20% of AW. The OECD average excludes Chile for 2008 and Mexico for 2008

and 2013. For Turkey, the average worker earnings (AW) value is not available. Calculations are based on average production worker

earnings (APW).

2. Initial phase of unemployment but following any waiting period. Any income taxes payable on unemployment benefits are

determined in relation to annualised benefit values (i.e. monthly values multiplied by 12) even if the maximum benefit duration is

shorter than 12 months.

3. After tax and including unemployment benefits, social assistance, family and housing benefits in the 60th month of benefit receipt.

Values for Italy and Turkey are equal to zero in 2008 and 2013.

Source:

OECD,

Tax-Benefit Models.

1 2

http://dx.doi.org/10.1787/888933324097

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4. STRUCTURAL POLICY INDICATORS

Figure 4.3.

Average tax wedge on labour

As a percentage of total labour compensation

A. At 67% of average worker earnings, single person without children

CHL

NZL

ISR

MEX

KOR

CHE

IRL

AUS

GBR

CAN

ISL

USA

LUX

JPN

NLD

OECD

NOR

POL

PRT

GRC

TUR

DNK

ESP

FIN

SVN

SVK

EST

CZE

SWE

ITA

AUT

DEU

FRA

HUN

BEL

IDN

ZAF

IND

BRA

CHN

LVA

IDN

IND

ZAF

BRA

LVA

CHN

2014

2009

B. At 100% of average worker earnings, couple with two children²

CHL

NZL

CHE

IRL

ISR

MEX

KOR

LUX

AUS

CAN

USA

GBR

ISL

JPN

OECD

SVN

NLD

DNK

POL

CZE

SVK

NOR

PRT

EST

ESP

TUR

SWE

HUN

FIN

DEU

AUT

ITA

FRA

GRC

BEL

2014

2009

1. Measured as the difference between total labour compensation paid by the employer and the net take-home pay of employees, as a

ratio of total labour compensation. It therefore includes both employer and employee social security contributions. For India, the data

cover manufacturing companies with 20 or more employees (which represent 5% of all companies in the sector); liability to health

insurance and Employee Provident Fund contributions in India are restricted to employees in firms that have 20 or more employees.

In China, a significant portion of workers are not covered by the social security system; hence their tax wedge is significantly lower

than the figure reported here, which reflects the situation of workers covered.

2. Couple with two children, at 100% of average worker earnings for the first earner. Average of three situations regarding the wage of

the second earner (0%, 33% and 67% of average worker earnings).

Source:

OECD,

Taxing Wages Database;

For BIICS countries, data represent the latest figures based on the methodology described in :

Gandullia, L., N. Iacobone and A. Thomas (2012), “Modelling the tax burden on labour income in Brazil, China, India, Indonesia and South

Africa”

OECD Taxation Working Papers,

No. 14; for Latvia, data are based on the methodology described in

Taxing Wages.

1 2

http://dx.doi.org/10.1787/888933324108

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Figure 4.4.

Marginal tax wedge on labour

As a percentage of total labour compensation for single persons without children

A. At 67% of average worker earnings

CHL

MEX

NZL

KOR

CHE

ISR

JPN

CAN

USA

POL

IRL

AUS

DNK

GBR

OECD

EST

ISL

NOR

TUR

SVN

SWE

ESP

LUX

SVK

NLD

GRC

CZE

HUN

PRT

FIN

ITA

DEU

AUT

FRA

BEL

IDN

ZAF

CHN

IND

BRA

LVA

IND

IDN

ZAF

BRA

CHN

LVA

IND

IDN

ZAF

CHN

BRA

LVA

2014

2009

B. At 100% of average worker earnings

CHL

MEX

KOR

NZL

CHE

JPN

POL

ISR

AUS

GBR

CAN

EST

DNK

ISL

TUR

USA

OECD

SVK

SWE

CZE

GRC

HUN

ESP

NOR

SVN

NLD

PRT

LUX

ITA

FIN

IRL

FRA

DEU

AUT

BEL

2014

2009

C. At 167% of average worker earnings

CHL

MEX

KOR

NZL

JPN

CHE

POL

CAN

ESP

AUS

EST

AUT

USA

DEU

SVK

ISR

OECD

TUR

ISL

CZE

HUN

GBR

NOR

NLD

LUX

GRC

DNK

IRL

FIN

FRA

SVN

PRT

ITA

SWE

BEL

2014

2009

1. Measured as the difference between the change in total labour compensation paid by employers and the change in the net take-home

pay of employees, as a result of an extra unit of national currency of labour income. The difference is expressed as a percentage of the

change in total labour compensation. For India, the data cover manufacturing companies with 20 or more employees (which represent

5% of all companies in the sector); liability to health insurance and Employee Provident Fund contributions in India are restricted to

employees in firms that have 20 or more employees. In China, a significant portion of workers are not covered by the social security

system; hence their tax wedge is significantly lower than the figure reported here, which reflects the situation of workers covered.

Source:

OECD,

Taxing Wages Database;

For BIICS countries, data represent the latest figures based on the methodology described in :

Gandullia, L., N. Iacobone and A. Thomas (2012), “Modelling the tax burden on labour income in Brazil, China, India, Indonesia and South

Africa”

OECD Taxation Working Papers,

No. 14; for Latvia, data are based on the methodology described in

Taxing Wages.

1 2

http://dx.doi.org/10.1787/888933324113

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4. STRUCTURAL POLICY INDICATORS

Figure 4.5.

Changes in net pension wealth

As a percentage of gross annual individual earnings

A. Early retirement: age 55 to 59

2012

-5

-10

-15

MEX

NZL

ESP

USA

DEU

GBR

PRT

NOR

DNK

CAN

FRA

ISL

BEL

EST

POL

CHL

NLD

AUS

SWE

IRL

JPN

OECD

FIN

SVK

KOR

AUT

ISR

CZE

ITA

HUN

LUX

TUR

CHE

GRC

SVN

CHN

IDN

ZAF

BRA

LVA

RUS

IND

BRA

RUS

LVA

CHN

IDN

ZAF

IND

-20

2008

-5

-10

-15

-20

B. Old-age pension: age 60 to 64

2012

-5

-10

-15

LUX

PRT

MEX

SVN

GRC

FRA

BEL

EST

DEU

USA

SWE

CAN

NZL

ESP

AUS

GBR

OECD

DNK

NOR

HUN

AUT

POL

NLD

IRL

CHL

ISL

CHE

FIN

JPN

ISR

KOR

SVK

CZE

ITA

TUR

-20

2008

-5

-10

-15

-20

1. The change in pension wealth is a measure of the incentive to remain in the workforce for an additional period. It measures the

increase in the level of pension entitlement one gains by remaining in employment for an additional year. The calculation is the

annual average increase in males’ pension wealth when working from age 55 to 59 (early retirement) and from age 60 to 64 (old-age

pension). Net pension wealth is the present value of the flow of pension benefits, taking account of the taxes and social security

contributions that retirees have to pay on their pensions. It is measured and expressed as a multiple of gross annual individual

earnings in the respective country. See OECD (2013), Pensions at a Glance 2013: OECD and G20 Indicators for additional details.

Source:

OECD,

Pension Models.

1 2

http://dx.doi.org/10.1787/888933324127

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STRUCTURAL POLICY INDICATORS

Figure 4.6.

Difference in net transfers to government: single and equal dual-earner couples

Percentage points

120

110

100

-10

2013

2008

120

110

100

-10

DEU

FRA

SVK

CZE

USA

HUN

EST

POL

ISL

CHE

DNK

CHL

BEL

JPN

SVN

OECD

TUR

NOR

LUX

ESP

PRT

AUS

ITA

CAN

AUT

GBR

SWE

NZL

KOR

FIN

NLD

IRL²

GRC

MEX

1. The figure highlights the differential tax / benefit “regime” between single and dual-earner couple families, for a given overall level of

earnings – e.g. looking at couple families with incomes of 133% of average earnings. It shows the difference in net transfers to

government between two household cases: (1) “Single-earner couples” – with one earner with 133% of average earnings and (2) “Equal

dual-earner couples”- both spouses earn the same either average earnings or 67% of average earnings. The difference is in percentage

points and computed as [(1)-(2)]/(1).

2. The value for 2008 is not reported as it is highly distorted due to the fact that the net transfers to government from single-earner

couples is close to zero.

Source:

OECD,

Tax-Benefit Models.

1 2

http://dx.doi.org/10.1787/888933324131

Figure 4.7.

Public expenditure on childcare services

As a percentage of GDP, 2011

2.25

Pre-school

2.00

1.75

1.50

1.25

1.00

0.75

0.50

0.25

SVK

JPN

SVN

ESP

LUX

GBR

DEU

HUN

KOR

NLD

FIN

NOR

EST

USA

CZE

AUS

MEX

DNK

ISR

PRT

AUT

CHL

POL

FRA

SWE

OECD²

LVA

BEL

ITA

IRL

NZL

EU²

ISL

0.00

Childcare

Total, 2006

LVA

2.25

2.00

1.75

1.50

1.25

1.00

0.75

0.50

0.25

0.00

1. Childcare expenditure covers children under three enrolled in childcare and children between the ages of three and five enrolled in

pre-school. Childcare refers to formal day-care services, such as day-care centres and family day-care. Pre-school includes

kindergartens and day-care centres which usually provide an educational content as well as traditional care for children (ISCED 0

under UNESCO’s classification system). Local government spending may not be properly captured in the data for federal countries.

2. EU and OECD averages exclude Canada, Greece, Switzerland and Turkey.

Source:

OECD,

Family and Social Expenditure Databases.

1 2

http://dx.doi.org/10.1787/888933324149

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4. STRUCTURAL POLICY INDICATORS

Figure 4.8.

Implicit tax on returning to work

As a percentage of gross earnings in new job, 2012

Childcare fee

Decrease in benefits

Increase in social contributions and income tax

Total increase

A. Second earner taking up employment²

140

120

100

-20

-40

ESP

NLD

HUN

DEU

JPN

SVK

FIN

DNK

CAN

SVN

CZE

LUX

ISR

BEL

AUS

CHE

USA

EST

FRA

PRT

AUT

POL

OECD³

KOR

GRC

SWE

NOR

GBR

LVA

ISL

IRL

NZL

EU³

-60

140

120

100

-20

-40

-60

B. Lone parent taking up employment

120

100

-20

HUN

NOR

GRC

KOR

NLD

SVK

ESP

GBR

DEU

EST

SWE

SVN

FRA

AUS

FIN

LUX

CZE

ISR

CHE

DNK

USA

CAN

PRT

POL

BEL

AUT

OECD³

JPN

NZL

ISL

EU³

IRL

-40

120

100

-20

-40

1. Net transfers and childcare fees for households with two children aged 2 and 3. Taking into account childcare fees and changes of

taxes and benefits in case of a transition to a job paying two-thirds of average worker earnings.

2. Second earner taking up employment at 67% of average wage and the first earner earns 100% of average wage.

3. The OECD average excludes Chile, Italy, Mexico and Turkey.

4. Lone parent taking up employment at 67% of average wage.

Source:

OECD,

Tax-Benefit Models; www.oecd.org/els/social/workincentives.

1 2

http://dx.doi.org/10.1787/888933324153

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STRUCTURAL POLICY INDICATORS

Figure 4.9.

Net costs of childcare

Childcare-related costs and benefits as a percentage of average wage, 2012

Childcare fee

Childcare benefits

Tax reductions

Net Cost

A. Couples¹

-20

-40

NOR

GBR

HUN

KOR

SVN

NLD

ESP

SVK

LUX

GRC

DNK

CZE

CHE

DEU

SWE

CAN

USA

FRA

AUS

EST

JPN

AUT

PRT

POL

BEL

OECD²

NZL

LVA

ISR

FIN

ISL

EU²

IRL

-60

-20

-40

-60

B. Lone parent¹

-20

-40

-60

FIN

JPN

ISR

ISL

EU²

OECD²

NOR

NLD

ESP

GBR

DNK

HUN

CHE

SVN

EST

KOR

GRC

DEU

AUS

CAN

SVK

LUX

CZE

SWE

USA

FRA

PRT

AUT

POL

BEL

NZL

IRL

-80

-20

-40

-60

-80

1. Couples where the first earner earns 100% of the average wage and the second earns 67% of the average wage. Lone parent earning

67% of the average wage. For Canada, the European Union, Finland, Norway, OECD, Slovak Republic, Slovenia and the United Kingdom,

childcare benefits refer to childcare and other benefits.

2. EU and OECD averages exclude Chile, Italy, Mexico and Turkey.

Source:

OECD,

Tax-Benefit Models; www.oecd.org/els/social/workincentives.

1 2

http://dx.doi.org/10.1787/888933324163

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4. STRUCTURAL POLICY INDICATORS

Figure 4.10.

Average tax wedge: single parent versus second earner

Percentage

A. Single parent¹

-10

-20

-30

IRL

NZL

CAN

AUS

ISR

CHE

GBR

LUX

CHL

DNK

NLD

USA

SVN

MEX

KOR

ISL

OECD

NOR

JPN

CZE

PRT

HUN

SVK

ITA

EST

FIN

AUT

POL

ESP

DEU

SWE

TUR

BEL

FRA

GRC

IDN

ZAF

LVA

IND²

BRA

CHN

IDN

ZAF

IND²

BRA

CHN

LVA

-40

2014

2009

-10

-20

-30

-40

B. Second earner³

2014

CHL

ISR

MEX

KOR

CHE

GBR

NLD

JPN

NZL

NOR

IRL

USA

POL

TUR

AUS

OECD

FIN

GRC

CAN

LUX

SWE

ESP

EST

DNK

SVK

AUT

PRT

ITA

ISL

FRA

CZE

HUN

SVN

DEU

BEL

2009

1. Single parent with two children earning 67% of the average wage.

2. Results apply only for the minority case where the employee works in a firm with more than 20 employees.

3. Average tax wedge faced by the second earner when earning 67 % of the average wage in a family with two children, where the first

earner receives a full average wage.

Source: Taxing Wages 2015 (calculations based on data retrieved from OECD.Stat: http://dotstat.oecd.org/Index.aspx?DataSetCode=AWCOU) and

Taxing Wages Models

for non-OECD member countries.

1 2

http://dx.doi.org/10.1787/888933324177

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Figure 4.11.

Number of weeks lost due to sick leave

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

SVK

ESP

NLD

GRC

GBR

SVN

TUR

NOR

USA

HUN

CHE

DNK

CZE

ITA

LUX

EST

CAN

AUT

POL

SWE

DEU

FRA

OECD¹

PRT

LVA

BEL

FIN

IRL

ISL

0.0

2014

2009

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

1. The OECD average excludes Australia, Chile, Israel, Japan, Korea, Mexico and New Zealand.

Source:

OECD estimates based on the European Labour Force Survey (unpublished data), the Canadian Labour Force Survey and published

U.S Current Population Survey estimates on lost working time rate due to injury or illness of full-time wage and salary workers.

1 2

http://dx.doi.org/10.1787/888933324184

Figure 4.12.

Public expenditure on active labour market policies per unemployed

As a percentage of GDP per capita

1. Data refer to 2012 for France, Korea, New Zealand, Poland and Spain; 2011 for Israel and the United Kingdom. OECD and EU averages

exclude Greece, Iceland and Turkey.

Source:

OECD,

Public expenditure and participant stocks on Labour Market Programmes and Economic Outlook Databases.

1 2

http://dx.doi.org/10.1787/888933324193

MEX

SVK

USA

CHL

ESP

EST

ISR

GBR

PRT

CAN

SVN

NZL

JPN

AUS

ITA

CZE

POL

IRL

OECD

HUN

KOR

BEL

LUX

FRA

NLD

CHE

DEU

FIN

AUT

NOR

SWE

DNK

2013¹

2008

131

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4. STRUCTURAL POLICY INDICATORS

Figure 4.13.

Employment protection legislation

Index scale of 0-6 from least to most restrictive

A. Protection for regular employment

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013¹

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

USA

CAN

GBR

NZL

HUN

CHE

IRL

AUS

JPN

EST

SVK

MEX

ESP

SVN

OECD

ISL

GRC

DNK

AUT

BEL

POL

TUR

NOR

LUX

KOR

ISR

FIN

SWE

CHL

DEU

ITA

FRA

NLD

CZE

PRT

B. Protection for temporary employment

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013¹

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

CAN

USA

GBR

NZL

AUS

NLD

SWE

IRL

JPN

ISL

CHE

ISR

DEU

DNK

FIN

HUN

OECD

CZE

SVN

AUT

MEX

POL

PRT

BEL

CHL

SVK

KOR

ITA

GRC

EST

ESP

NOR

FRA

LUX

TUR

C. Additional protection on collective dismissals²

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013¹

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

CHL

NZL

FIN

ISR

KOR

PRT

CZE

NOR

SWE

TUR

GBR

AUS

DNK

EST

POL

USA

OECD

CAN

NLD

AUT

GRC

JPN

FRA

SVK

SVN

ESP

ISL

IRL

DEU

HUN

CHE

ITA

LUX

MEX

BEL

1. Data refer to 2014 for Colombia, Slovenia and the United Kingdom; 2012 for BRIICS countries and Latvia.

2. Values for 2013 are equal to zero for Chile, Indonesia and New Zealand.

Source:

OECD,

Employment Protection Database.

1 2

http://dx.doi.org/10.1787/888933324200

132

IDN

IND

BRA

RUS

ZAF

CHN

LVA

COL

ZAF

RUS

LVA

CHN

COL

IND

IDN

BRA

COL

BRA

ZAF

LVA

RUS

CHN

IND

IDN

SAU, Alm.del - 2016-17 - Bilag 3: OECD publikationer om inklusiv vækst

STRUCTURAL POLICY INDICATORS

Figure 4.14.

Coverage rates of collective bargaining agreements and trade union density rates

Percentage

A. Coverage rates of collective bargaining agreements¹

120

110

100

2013

2008

120

110

100

TUR

KOR

USA

MEX

POL

NZL

JPN

CHL

HUN

EST

SVK

ISR

CAN

GBR

IRL

GRC

CZE

CHE

OECD

DEU

LUX

AUS

SVN

NOR

PRT

ESP

ITA

DNK

NLD

ISL

SWE

FIN

BEL

AUT

FRA

B. Trade union density rates²

100

EST

TUR

FRA

KOR

HUN

USA

CZE

POL

SVK

MEX

AUS

CHL

CHE

ESP

JPN

NLD

DEU

NZL

PRT

SVN

GRC

ISR

GBR

CAN

OECD

IRL

AUT

LUX

ITA

NOR

BEL

DNK

SWE

FIN

ISL

IDN

LVA

BRA

RUS

ZAF

2013

2008

100

1. The coverage rate is measured as the percentage of workers who are covered by collective bargaining agreements, regardless of

whether or not they belong to a trade union. For 2013, data refer to 2012 for Australia, Estonia, France, Israel, Korea, Luxembourg,

Mexico, Poland, Indonesia and South Africa; 2011 for New Zealand; 2010 for Italy; 2009 for Ireland. For 2008, data refer to 2009 for Chile,

Denmark, Estonia, Hungary, Ireland, Mexico, Norway, Switzerland, Brazil, the Russian Federation and Latvia; 2007 for New Zealand,

Poland and Sweden; 2005 for Italy; 2000 for Israel.

2. The union density rate is the percentage of workers belonging to a trade union. The rates refer to wage and salary workers. The last

available year is 2014 for Australia, Canada, Chile, Iceland, Ireland, Japan, Mexico, New Zealand, Sweden, Switzerland, the

United Kingdom and the United States; 2012 for Indonesia, Israel, Korea, Latvia, Luxembourg, Poland, Portugal and South Africa; 2011

for Brazil.

Source:

OECD estimates and J. Visser,

ICTWSS Database, Version 5.0. Amsterdam: Amsterdam Institute for Advanced Labour Studies AIAS,

October 2015.

1 2

http://dx.doi.org/10.1787/888933324219

IDN

LVA

RUS

ZAF

BRA

133

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4. STRUCTURAL POLICY INDICATORS

Figure 4.15.

Product market regulation and state control of business operation

Index scale of 0-6 from least to most restrictive

A. Restrictiveness of economy-wide product market regulation

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

NLD

ESP

EST

GBR

JPN

CAN

CHL

AUT

BEL

HUN

PRT

ITA

ISL

MEX

SVK

KOR

OECD

DEU

LUX

SVN

GRC

DNK

CZE

NZL

ISR

FIN

AUS

IRL

FRA

NOR

SWE

TUR

CHE

POL

C. State control: involvement in business operation

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

NOR

AUS

CZE

DEU

SWE

GBR

DNK

AUT

NZL

IRL

FIN

EST

ISL

NLD

MEX

FRA

JPN

CHE

CAN

OECD

SVK

ITA

HUN

POL

ESP

PRT

CHL

BEL

LUX

SVN

KOR

GRC

ISR

TUR

Source:

OECD,

Product Market Regulation Database

and Koske, I., I. Wanner, R. Bitetti and O. Barbiero, (2015), “The 2013 Update of the OECD

Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries”, OECD

Economics Department Working Papers,

1200/2015; OECD-WBG

Product Market Regulation Database

for Colombia.

1 2

http://dx.doi.org/10.1787/888933324229

134

LVA

BRA

COL

ZAF

RUS

CHN

IND

LVA

COL

BRA

ZAF

RUS

CHN

IND

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

NLD

GBR

AUT

DNK

NZL

ITA

SVK

AUS

EST

FIN

DEU

PRT

HUN

BEL

CZE

JPN

CAN

ESP

IRL

LUX

NOR

OECD

FRA

ISL

CHE

CHL

SWE

POL

SVN

GRC

KOR

MEX

ISR

TUR

B. State control: public ownership

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

LVA

COL

ZAF

RUS

BRA

CHN

IND

SAU, Alm.del - 2016-17 - Bilag 3: OECD publikationer om inklusiv vækst

STRUCTURAL POLICY INDICATORS

Figure 4.16.

Barriers to entrepreneurship

Index scale of 0-6 from least to most restrictive

A. Complexity of regulatory procedures

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

PRT

SVK

ITA

HUN

AUT

NLD

DNK

CAN

NZL

POL

LUX

MEX

BEL

FRA

FIN

JPN

CHE

OECD

DEU

KOR

EST

NOR

GRC

AUS

SVN

GBR

CZE

ISL

SWE

ESP

IRL

ISR

TUR

CHL

B. Administrative burdens on startups

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

AUS

NZL

CHL

CHE

NLD

DNK

CAN

NOR

GBR

SWE

IRL

JPN

DEU

FIN

EST

KOR

OECD

SVN

ISL

AUT

SVK

CZE

ITA

FRA

ISR

ESP

GRC

LUX

MEX

PRT

BEL

POL

HUN

TUR

C. Regulatory protection of incumbents

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

GBR

EST

CZE

AUT

SVK

SWE

POL

ITA

IRL

SVN

ESP

PRT

CHL

DNK

NLD

FIN

GRC

FRA

OECD

LUX

NZL

BEL

DEU

CAN

HUN

CHE

ISL

JPN

NOR

KOR

TUR

AUS

ISR

MEX

Source:

OECD,

Product Market Regulation Database

and Koske, I., I. Wanner, R. Bitetti and O. Barbiero, (2015), “The 2013 Update of the OECD

Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries”, OECD

Economics Department Working Papers,

1200/2015; OECD-WBG

Product Market Regulation Database

for Colombia.

1 2

http://dx.doi.org/10.1787/888933324232

LVA

COL

CHN

BRA

RUS

IND

ZAF

RUS

ZAF

COL

LVA

BRA

IND

CHN

RUS

COL

LVA

ZAF

CHN

BRA

IND

135

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4. STRUCTURAL POLICY INDICATORS

Figure 4.17.

Barriers to trade and investment

Index scale of 0-6 from least to most restrictive

A. Barriers to FDI

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

LUX

PRT

SVN

CZE

NLD

EST

FIN

ESP

DEU

HUN

GRC

DNK

BEL

IRL

SVK

ITA

JPN

CHL

SWE

TUR

GBR

POL

OECD

CHE

NOR

FRA

AUT

AUS

KOR

ISL

ISR

CAN

MEX

NZL

COL

LVA

ZAF

BRA

RUS

IND

CHN

LVA

COL

RUS

ZAF

CHN

IND

BRA

IND

LVA

CHN

COL

ZAF

RUS

BRA

0.0

2013

2008

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

B. Tariff barriers

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

AUS

AUT

BEL

CAN

CHL

CZE

DNK

EST

FIN

FRA

DEU

GRC

HUN

ISL

IRL

ISR

ITA

JPN

LUX

NLD

NZL

NOR

POL

PRT

SVK

SVN

ESP

SWE

CHE

TUR

GBR

OECD

MEX

KOR

0.0

2013

2008

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

C. Other barriers to trade and investment

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

AUS

NLD

NZL

GBR

BEL

POL

CHE

FIN

HUN

IRL

ISL

LUX

FRA

DEU

ESP

CHL

PRT

ITA

OECD

CZE

DNK

AUT

NOR

GRC

KOR

SVK

SWE

JPN

EST

CAN

ISR

SVN

MEX

TUR

0.0

2013

2008

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Source:

OECD,

Product Market Regulation Database

and Koske, I., I. Wanner, R. Bitetti and O. Barbiero, (2015), “The 2013 Update of the OECD

Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries”, OECD

Economics Department Working Papers,

1200/2015; OECD-WBG

Product Market Regulation Database

for Colombia.

1 2

http://dx.doi.org/10.1787/888933324249

136

SAU, Alm.del - 2016-17 - Bilag 3: OECD publikationer om inklusiv vækst

STRUCTURAL POLICY INDICATORS

Figure 4.18.

Sectoral regulation in the transport sector

Index scale of 0-6 from least to most restrictive

A. Airlines sector

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

AUS

AUT

CHL

DEU

GRC

HUN

ISL

ITA

SVK

ESP

CHE

GBR

BEL

NLD

DNK

NOR

FRA

SWE

IRL

OECD

CAN

JPN

KOR

ISR

LUX

FIN

MEX

NZL

TUR

POL

CZE

EST

PRT

SVN

B. Rail sector

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

GBR

CAN

CZE

DNK

DEU

AUS

AUT

EST

ITA

POL

NOR

JPN

SWE

HUN

NLD

SVK

OECD

BEL

FRA

SVN

PRT

CHE

MEX

ESP

CHL

FIN

GRC

KOR

IRL

LUX

ISR

NZL

TUR

C. Road sector

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

AUS

CAN

ISR

CHE

AUT

DNK

FIN

DEU

IRL

JPN

LUX

MEX

NZL

NOR

SVK

SWE

GBR

OECD

HUN

BEL

CZE

EST

ISL

KOR

NLD

POL

PRT

SVN

ESP

CHL

GRC

FRA

TUR

ITA

Source:

OECD,

Product Market Regulation Database

and Koske, I., I. Wanner, R. Bitetti and O. Barbiero, (2015), “The 2013 Update of the OECD

Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries”, OECD

Economics Department Working Papers,

1200/2015; OECD-WBG

Product Market Regulation Database

for Colombia.

1 2

http://dx.doi.org/10.1787/888933324253

BRA

RUS

ZAF

IND

LVA

CHN

COL

LVA

RUS

COL

BRA

IND

CHN

ZAF

BRA

COL

IND

CHN

LVA

RUS

ZAF

137

SAU, Alm.del - 2016-17 - Bilag 3: OECD publikationer om inklusiv vækst

4. STRUCTURAL POLICY INDICATORS

Figure 4.19.

Sectoral regulation in the energy sector

Index scale of 0-6 from least to most restrictive

A. Electricity sector

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

ESP

PRT

DEU

GBR

CHL

ITA

HUN

FIN

AUT

BEL

NLD

NZL

POL

JPN

SVK

IRL

AUS

NOR

SWE

CZE

OECD

DNK

CHE

SVN

GRC

LUX

TUR

FRA

EST

CAN

KOR

ISL

ISR

MEX

B. Gas sector

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

GBR

ESP

DEU

PRT

CAN

BEL

SWE

HUN

AUS

ITA

CZE

NZL

EST

AUT

CHL

NLD

ISR

OECD

FRA

JPN

LUX

DNK

SVK

SVN

IRL

TUR

GRC

CHE

NOR

POL

FIN

MEX

KOR

Source:

OECD,

Product Market Regulation Database

and Koske, I., I. Wanner, R. Bitetti and O. Barbiero, (2015), “The 2013 Update of the OECD

Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries”, OECD

Economics Department Working Papers,

1200/2015; OECD-WBG

Product Market Regulation Database

for Colombia.

1 2

http://dx.doi.org/10.1787/888933324263

138

COL

CHN

IND

RUS

LVA

ZAF

BRA

COL

RUS

IND

LVA

CHN

ZAF

SAU, Alm.del - 2016-17 - Bilag 3: OECD publikationer om inklusiv vækst

STRUCTURAL POLICY INDICATORS

Figure 4.20.

Sectoral regulation in the post and telecommunication sectors

Index scale of 0-6 from least to most restrictive

A. Telecommunication sector

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

GBR

POL

ITA

CZE

NLD

DNK

ISL

KOR

IRL

CAN

NZL

AUS

ESP

FIN

EST

HUN

PRT

GRC

OECD

CHL

FRA

ISR

AUT

JPN

MEX

DEU

TUR

SWE

SVK

BEL

NOR

CHE

SVN

LUX

B. Post sector

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

NLD

DNK

BEL

DEU

AUT

CZE

POL

CHL

JPN

KOR

LUX

MEX

SVK

ESP

GBR

OECD

SWE

CAN

FRA

IRL

GRC

EST

HUN

ISR

NZL

PRT

CHE

TUR

AUS

FIN

ITA

NOR

SVN

ISL

Source:

OECD,

Product Market Regulation Database

and Koske, I., I. Wanner, R. Bitetti and O. Barbiero, (2015), “The 2013 Update of the OECD

Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries”, OECD

Economics Department Working Papers,

1200/2015; OECD-WBG

Product Market Regulation Database

for Colombia.

1 2

http://dx.doi.org/10.1787/888933324272

COL

RUS

LVA

BRA

CHN

IND

ZAF

BRA

COL

RUS

LVA

ZAF

CHN

IND

139

SAU, Alm.del - 2016-17 - Bilag 3: OECD publikationer om inklusiv vækst

4. STRUCTURAL POLICY INDICATORS

Figure 4.21.

Sectoral regulation in retail and professional services

Index scale of 0-6 from least to most restrictive

A. Retail

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

SWE

SVN

KOR

NZL

AUS

NLD

CHL

CHE

ISL

EST

IRL

CZE

DNK

SVK

GBR

PRT

NOR

OECD

HUN

MEX

TUR

JPN

AUT

CAN

GRC

POL

FRA

DEU

FIN

ESP

ITA

ISR

BEL

LUX

B. Professional services

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2013

2008

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

SWE

FIN

GBR

DNK

CHE

AUS

NOR

NZL

NLD

IRL

MEX

CHL

ISL

EST

OECD

ITA

JPN

KOR

FRA

CZE

ESP

BEL

SVN

ISR

DEU

AUT

SVK

PRT

GRC

HUN

CAN

POL

LUX

TUR

Source:

OECD,

Product Market Regulation Database

and Koske, I., I. Wanner, R. Bitetti and O. Barbiero, (2015), “The 2013 Update of the OECD

Product Market Regulation Indicators: Policy Insights for OECD and non-OECD Countries”, OECD

Economics Department Working Papers,

1200/2015; OECD-WBG

Product Market Regulation Database

for Colombia.

1 2

http://dx.doi.org/10.1787/888933324281

140

COL

ZAF

BRA

CHN

LVA

ZAF

COL

BRA

IND

CHN

RUS

SAU, Alm.del - 2016-17 - Bilag 3: OECD publikationer om inklusiv vækst

STRUCTURAL POLICY INDICATORS

Figure 4.22.

Educational attainment

As a percentage of population aged 25-34 and 45-54, 2014

A. Upper secondary education

45-54

100

25-34

100

KOR

CZE

POL

SVN

CAN

SVK

CHE

ISR

FIN

IRL

AUT

USA

EST

DEU

HUN

LUX

AUS

GBR

FRA

NLD

OECD²

BEL

DNK

SWE

GRC

NOR

NZL

CHL

ITA

ISL

ESP

PRT

TUR

MEX

B. Tertiary education

100

KOR

CAN

LUX

IRL

GBR

NOR

AUS

ISR

CHE

SWE

USA

NLD

BEL

FRA

POL

DNK

ESP

OECD

ISL

NZL

FIN

EST

GRC

AUT

SVN

JPN

HUN

PRT

CZE

SVK

DEU

CHL

TUR

MEX

ITA

1. Data refer to 2013 for Brazil, Chile and France; 2012 for South Africa; 2011 for Indonesia; 2010 for China.

2. Data are missing for Japan.

Source:

OECD,

Education at a Glance 2015: OECD Indicators.

1 2

http://dx.doi.org/10.1787/888933324290

LVA

COL

CHN

BRA

IDN

ZAF

LVA

ZAF

COL

BRA

IDN

CHN

141

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4. STRUCTURAL POLICY INDICATORS

Figure 4.23.

Graduation rates in upper secondary and tertiary education

Percentage

A. Upper secondary education

120

110

100

2013

2005

120

110

100

NLD

SVK

GBR

OECD

CHN

CHE

NOR

DEU

SWE

DNK

PRT²

RUS

TUR

SVN

ESP

CZE

FIN

IND

LUX

JPN

AUS

USA

CHL

AUT

NZL

LVA

ITA

2013

2005

MEX

TUR

ESP

LUX

CZE

ITA

SWE

USA

NOR

HUN

OECD

SVK

SVN

CAN

CHL

POL

AUT

ISR

KOR

DNK

CHE

FIN

JPN

IRL

NZL

PRT²

GRC

ISL

B. Tertiary education

1. Graduation rates represent the estimated percentage of people from a given age cohort that is expected to graduate at some point

during their lifetime. This estimate is based on the number of graduates in a given year, regardless of their age, divided by the size of

the average cohort of the typical age of graduation. In panel A, OECD and EU averages exclude Australia, Belgium, Estonia, France,

Germany, the Netherlands, the United Kingdom and exclude for 2005 only Austria, Hungary, Israel, Sweden, Switzerland and Turkey.

In panel B, OECD and EU averages exclude Belgium, Canada, Estonia, France, Greece, Hungary, Iceland, Ireland, Israel, Korea, Mexico

and Poland.

2. Estimated graduation rates can be very high, even above 100%, when a significant number of people above the typical age of

graduation returns to school. One such example is the New Opportunities programme in Portugal.

3. First-time graduation rates for ISCED 3. The last available year is 2014 for China and India; data refer to 2007-08 instead of 2005 for

India. For Brazil and the Russian Federation, data refer to graduation rate at upper secondary level for typical age from the general

programmes except for India for which upper secondary education is defined as persons aged 19 year olds who completed upper

secondary education.

4. First-time graduation rates for ISCED 5 to 7. Data refer to 2014 for China and India and to 2007-08 instead of 2005 for India. For India,

tertiary education refers to the 24 year olds and over who have graduated.

Source:

OECD,

Education at a Glance 2015: OECD Indicators;

CEIC for China data; India National Sample Survey.

1 2

http://dx.doi.org/10.1787/888933324301

142

IND

RUS

CHN

BRA

IDN

COL

LVA

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STRUCTURAL POLICY INDICATORS

Figure 4.24.

Educational achievement

Average of PISA scores in reading, mathematics and science

550

2012

525

500

475

450

425

400

375

350

325

MEX

CHL

TUR

GRC

SVK

ISR

SWE

ISL

HUN

PRT

ITA

ESP

LUX

USA

NOR

OECD

DNK

SVN

FRA

CZE

AUT

GBR

NZL

BEL

AUS

DEU

IRL

CHE

NLD

POL

CAN

EST

FIN

JPN

KOR

IDN

COL

BRA

RUS

LVA

IND

300

2009

550

525

500

475

450

425

400

375

350

325

300

1. PISA is the Programme for International Student Assessment. Data for India is the average for 2010 of the states of Tamil Nadu and

Himachal Pradesh and therefore may not be representative of nation-wide outcomes.

Source:

OECD (2014),

PISA 2012 Results: What Students Know and Can Do (Volume I, Revised edition, February 2014): Student Performance in

Mathematics, Reading and Science,

PISA.

1 2

http://dx.doi.org/10.1787/888933324311

Figure 4.25.

Variance of educational achievement

Total variance in PISA scores in reading, mathematics and science

140

2012

130

120

110

100

2009

140

130

120

110

100

MEX

CHL

EST

TUR

DNK

IRL

POL

ESP

KOR

CAN

FIN

CZE

SVN

GRC

CHE

HUN

USA

PRT

AUT

NLD

OECD

ITA

DEU

JPN

ISL

NOR

GBR

AUS

SWE

LUX

BEL

SVK

FRA

NZL

ISR

1. PISA is the Programme for International Student Assessment. OECD = 100. Average of PISA scores in mathematics and science only

in 2009 for France. The variance components in mathematics, sciences and reading were estimated for all students in participating

countries with data on socio-economic background and study programmes. The variance in student performance is calculated as the

square of the standard deviation of PISA scores in reading, mathematics and science for the sample of students used in the analysis.

Source:

OECD (2014),

PISA 2012 Results: What Students Know and Can Do (Volume I, Revised edition, February 2014): Student Performance in

Mathematics, Reading and Science,

PISA; OECD (2013),

PISA 2012 Results: Excellence through Equity (Volume II): Giving Every Student the Chance to

Succeed,

PISA.

1 2

http://dx.doi.org/10.1787/888933324326

IDN

COL

BRA

LVA

RUS

143

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4. STRUCTURAL POLICY INDICATORS

Figure 4.26.

Influence of socio-economic and cultural background

on student reading performance

Strength of the link between the reading score and the socio-economic index

MEX

EST

TUR

ISL

CAN

ITA

CHL

ESP

PRT

KOR

NOR

FIN

USA

GRC

POL

LUX

DEU

OECD

CHE

JPN

SWE

NLD

DNK

IRL

SVN

GBR

AUS

AUT

HUN

ISR

CZE

BEL

NZL

SVK

FRA

IDN

BRA

COL

LVA

RUS

COL

BRA

2012

2009

1. Defined as the estimated coefficient from the country-specific regression of PISA reading performance on corresponding index of

economic, social and cultural status (ESCS).

Source:

OECD (2011),

Education at a Glance 2011: OECD Indicators;

OECD (2013),

PISA 2012 Results: Excellence through Equity (Volume II): Giving

Every Student the Chance to Succeed,

PISA.

1 2

http://dx.doi.org/10.1787/888933324331

Figure 4.27.

Share of direct taxes

As a percentage of total tax revenue

2014²

CHL

MEX

TUR

ISR

HUN

GRC

GBR

NZL

KOR

EST

ISL

PRT

SVN

IRL

POL

OECD

AUS

ITA

LUX

ESP

SVK

FIN

FRA

CZE

NLD

CAN

DNK

BEL

SWE

NOR

DEU

AUT

CHE

USA

JPN

2009

1. Direct taxes aggregate taxes on income, profits and capital gains, social security contributions and taxes on payroll and workforce.

2. The last available year is 2013 for Australia, Brazil, Colombia, Japan, Mexico, the Netherlands and Poland.

Source:

OECD,

Revenue Statistics Database.

1 2

http://dx.doi.org/10.1787/888933324343

144

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STRUCTURAL POLICY INDICATORS

Figure 4.28.

Health expenditure

As a percentage of GDP

2013¹

TUR

EST

MEX

POL

LUX

KOR

CZE

CHL

HUN

ISR

SVK

IRL

GBR

SVN

FIN

ESP

ISL

AUS

ITA

OECD

PRT

GRC

NOR

NZL

CAN

AUT

JPN

BEL

DNK

FRA

SWE

NLD

DEU

CHE

USA

IDN

IND

LVA

CHN

RUS

COL

ZAF

BRA

2008

1. Data refer to 2014 for Canada, China, Finland, Germany, Iceland, Italy, Japan, Korea, the Netherlands, Norway, Portugal, Slovenia and

Switzerland; 2012 for Australia, Ireland, Luxembourg.

Source:

OECD,

Health Database and China National Bureau of Statistics.

1 2

http://dx.doi.org/10.1787/888933324352

Figure 4.29.

Producer support estimate to agriculture

As a percentage of farm receipts

NZL AUS CHL CAN ISR USA MEX OECD EU¹ TUR ISL JPN KOR CHE NOR

ZAF BRA RUS COL CHN IDN

2014

2009

1. EU refers to all 28 members of the European Union.

Source:

OECD,

Producer and Consumer Support Estimates Database.

1 2

http://dx.doi.org/10.1787/888933324368

145

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4. STRUCTURAL POLICY INDICATORS

Figure 4.30.

Public investment

As a percentage of GDP

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

ISR

CHL

DEU

BEL

IRL

MEX

ITA

TUR

GBR

CHE

AUT

ISL

PRT

JPN

ESP

SVK

GRC

DNK

OECD

AUS

NZL

NLD

FIN

USA

FRA

HUN

LUX

CAN

NOR

CZE

SWE

SVN

POL

KOR

EST

RUS

ZAF

COL

LVA

0.0

2009-14¹

2004-09²

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

1. Average 2009-13 for Chile, Korea, Mexico, New Zealand, the Russian Federation and Colombia.

2. Average 2006-09 for Turkey.

Source:

OECD,

Economic Outlook Database.

1 2

http://dx.doi.org/10.1787/888933324378

146

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STRUCTURAL POLICY INDICATORS

Figure 4.31.

Financial support for private R&D investment

As a percentage of GDP

A. Direct public funding of business R&D

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

CHL

MEX

CHE

GRC

SVK

AUS

JPN

NLD

CAN

POL

TUR

PRT

LUX

ITA

DNK

NZL

IRL

FIN

OECD

NOR

DEU

ESP

GBR

BEL

ISL

EST

FRA

SWE

ISR

CZE

HUN

KOR

USA

AUT

SVN

ZAF

CHN

RUS

BRA

ZAF

CHN

0.00

2011-13¹

2006-08²

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

B. Indirect public support through R&D tax incentives

0.30

0.25

0.20

0.15

0.10

0.05

0.00

2013

2006

0.30

0.25

0.20

0.15

0.10

0.05

0.00

1. Average of years 2011 and 2013 for Iceland, New Zealand and Sweden; average of years 2011 and 2012 for France, Ireland, Israel, Italy,

Portugal and South Africa; 2012 for Switzerland; 2011 for Australia, Austria, Belgium and Mexico; 2009 for Luxembourg.

2. Average of years 2006 and 2007 for Austria; average of years 2007 and 2008 for Chile and Denmark; 2007 for Greece, Luxembourg, the

Netherlands, New Zealand and Sweden; 2008 for Switzerland.

3. The last available year is 2012 for Belgium, Brazil, Ireland, Spain, Switzerland, the United States and South Africa; 2011 for Australia,

Iceland, Mexico and the Russian Federation. Instead of 2006, data refer to 2007 for Belgium, Denmark, Italy, Korea, Mexico, Slovenia and

Sweden; 2008 for Chile, New Zealand, Switzerland and Turkey; 2009 for China.

Source:

Panel A: OECD,

Science and Technology Indicators Database;

Panel B: OECD,

R&D Tax Incentives Database, www.oecd.org/sti/rd-tax-

stats.htm,

December 2015.

1 2

http://dx.doi.org/10.1787/888933324384

EST

DEU

MEX

NZL

SWE

CHE

SVK

ITA

CHL

FIN

ESP

TUR

GRC

NOR

CZE

DNK

ISL

USA

OECD

GBR

PRT

SVN

AUT

AUS

HUN

JPN

NLD

IRL

CAN

BEL

KOR

FRA

147

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The OECD is a unique forum where governments work together to address the economic, social and

environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and

to help governments respond to new developments and concerns, such as corporate governance, the

information economy and the challenges of an ageing population. The Organisation provides a setting

where governments can compare policy experiences, seek answers to common problems, identify good

practice and work to co-ordinate domestic and international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic,

Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea,

Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,

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Economic Policy Reforms

Going for Growth

Interim Report

Going for Growth

is the OECD’s regular report on structural reforms in policy areas that have been identiﬁed

as priorities to boost incomes in OECD and selected non-OECD countries (Brazil, China, Colombia, India,

Indonesia, Latvia, Russian Federation and South Africa). Policy priorities are updated every two years and

presented in a full report, which includes individual country notes with detailed policy recommendations to

address the priorities. The next full report will be published in 2017.

This interim report takes stock of the actions taken by governments over the past year in the policy areas

identiﬁed as priorities for growth. This stocktaking is supported by internationally comparable indicators that

enable countries to assess their economic performance and structural policies in a wide range of areas.

Contents

Chapter 1. Overview of structural reforms in the policy areas identiﬁed as priorities for growth

Chapter 2. Reform priorities in a difﬁcult macro context

Chapter 3. From GDP to average household income: A look at the transmission channels

Chapter 4. Structural policy indicators

Consult this publication on line at

http://dx.doi.org/10.1787/growth-2016-en.

This work is published on the

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