The Impact of Structural Reforms on material living standards in OECD countries Conference on Macroeconomic Effects of Structural Reform, Ankara, October 26, 2007 Sven Blondal, Economics Department, OECD

2 Outline of the presentation Basic accounting framework to assess the impact: key building blocks Preliminary simulation results

The empirical framework GDP per capita can be decomposed into: Productivity component Average hours component Employment rate component Demographic component Empirical studies show that structural reforms can increase productivity, average hours worked and the employment rate 3

Productivity and structural reforms Structural reforms affect the level of labour productivity: The long-run: Permanently increasing the level of labour productivity. Dynamics: Speeding up the catch-up of labour productivity to best practice. Structural reforms may permanently affect the growth rate of labour productivity, but this is uncertain and not taken into account in OECD work. 4

Long-term productivity levels and structural reforms Long-term productivity levels depend on Investment in physical capital Investment in human capital Investment in research and development The strength of competition in domestic markets 5

Capital investment and structural policy Capital investment depends partly on investment in information and communication technology (ICT). Investment in ICT is strongly affected by the stringency of competition-restraining product market regulations (PMR) and human capital. Investment in non-ICT is likely to be affected by a host of policy factors (including corporate and other taxes) but these influences remain to be confirmed in OECD studies. 6

Human capital investment and structural policy Educational policy influences the volume and quality of human capital of young cohorts. Educational reforms take a long time to have their full effects on productivity levels. 7

Business R&D and structural policy R&D in the business sector can be stimulated by: Framework policies Strong competition in product markets, e.g. by reducing competition-restraining PMR, and adequate protection of intellectual property Educational policies that ensure that highly skilled staff is available to engage in innovation activity Employment protection arrangements that do not inhibit work re-organisation Innovation-specific policies Public research which can act as a lever for private R&D Financial support to private R&D through the tax system or public subsidies 8

Openness, competition and structural policy Openness and competition is facilitated by: –Low tariff and non-tariff barriers –Low barriers to inward foreign direct investment –Product market regulations geared towards strong competition in product markets –Competition policies aimed at preventing anti- competitive practices 9

Productivity dynamics and structural policies The speed at which countries catch up with high productivity countries depends on the degree of product market competition. Reforms of product market regulations that strengthen competition are therefore found to speed up the convergence with best performing countries. 10

Hours worked and structural reforms Structural policy affects hours worked: High marginal tax rates reduce average hours worked, but this effect is confined to women. Low statutory ceilings on normal hours and overtime hours reduce average hours worked, but this effect is confined to men. Generous provisions regarding annual paid leave, and sickness and maternity/paternity leave, show up in lower annual hours worked. Stringent product market regulations and employment protection legislation reduce average hours worked by men. 11

Employment rates and structural policies Employment rates of prime-age males, prime-age females, youth and people over the age of 55 are influenced to a varying degree by: Unemployment benefit levels and duration. Average tax wedge Disability benefit arrangements The employment rate of prime-age women is also affected by: Family cash benefits The length of maternity benefits Childcare support Educational attainment of women Product market regulations 12

Employment rates and structural policies (cont.) The employment rate of people over the age of 55 is also influenced by: The implicit tax on continued work embedded in pension and early retirement systems. The standard age of eligibility to old-age pensions. 13

Simulation of structural reforms The framework makes it possible to Derive the total GDP per capita effects of different structural reforms. Rank different policy reforms in terms of their effectiveness of raising GDP per capita. Assess the combined effects of raising all policy stances to the OECD average. 14

GDP per capita effects of different structural reforms: “10 per cent reforms” 15 "10 per cent shock" in the average countryGDP per capita impact (%) Unemployment benefit replacement rates6 ppt. reduction0.8 Average tax wedges3 ppt. reduction0.7 Standard retirement age6 years increase0.5 Implicit tax on continued work3 ppt. reduction0.1 Disability support rates0.7 ppt. reduction0.1 Product market regulations0.2 points on the OECD index1.9 (10 years); 1.2 (perm.) Average length of education, years increase0.5 (10 years); 4.4 (50 years)

GDP-per-capita impact of policy reforms: Preliminary results for Turkey (per cent) 16

GDP-per-capita impact of policy reforms: Preliminary results for France (per cent) 17