Structural reforms for long-term growth March 18, 2013 Zuzana Šmídová, OECD

What drives economic growth? 1 Note. To ensure that the percentage gap in the components of GDP add up to GDP per capita the decomposition is done in log point differences since the decomposition is multiplicative. GDP per capita is equal to the product of the components MFP, Human capital, (Physical capital/GDP) α/(1-α) and employment/population. Source: Long-term Growth Scenarios, OECD Economics Department Working Paper No. 1000, forthcoming

Uneven convergence in labour productivity levels over past decade 2 Labour productivity is measured as GDP per hour worked for OECD countries and Russia and as GDP per employee for the remaining BRIICS. Source: OECD National Accounts Statistics (Database); OECD (2012), OECD Economic Outlook No. 92: Statistics and Projections (Database); OECD, Employment Outlook (Database).

Difference vis-à-vis upper half of OECD countries GDP pcLabour utilisationProductivity 3

How to improve labour utilisation? 4

5 Long term unemployment a concern since the crisis Source: OECD, Quarterly Labour Market Indicators Database.

Improving labour utilisation Unemployment benefit schemes Active labour market policies Labour taxation (second income earners, older workers, AETR, METR, …) Labour market regulations and collective wage agreements Retirement and disability schemes 6

Unemployment benefit schemes 7 Net income replacement rates for unemployment1 Net income when unemployed as a percentage of net income when working

Unemployment benefit schemes 8

Active labour market policies 9 Public expenditure on active labour market policies per unemployed Percentage of GDP per capita

Retirement and disability schemes Official retirement age vs contributory period Unemployment of older workers (50+) Drawing a pension and/or working Working – is my pension increasing?, what tax, ssc do I pay? How long will I enjoy the pension (life expectancy, years spent in healthy life)? 10

Men’s pensionable age in OECD 11

Labour taxation – average tax wedge 12

Employment protection legislation 13

How to improve productivity? More competition and business environment– easing restrictions for entry to markets Increase human capital – education Improve general allocation of resources – cuts in state subsidies, better functioning of financial markets Framework conditions – general business environment, tax systems, innovation policies. 14

Product market regulation (PMR) Indicators measuring PMR de jure, internationally comparable, with historical data state control of business enterprises; legal and administrative barriers to entrepreneurship; barriers to international trade and investment World Bank’s Doing Business country ranking, etc. 15

Education Graduation rates (university) Returns to tertiary education How to get there – secondary education, school fees, scholarships Quality of education –Success in getting a job ( tertiary) –Success in getting to a uni ( secondary) – Primary? PISA tests (15 yr-olds in match, reading, science, specific modules) 16

Innovation 17 Business expenditure on R&D is uneven across countries Business enterprise expenditure on R&D as a percentage of GDP or last available year for Greece and Mexico; 2008 for Chile, Iceland, South Africa and Switzerland; 2009 for Australia, New Zealand and the United States; 2011 for Canada, Germany and Italy. Source: OECD, Main Science and Technology Indicators Database.

18 Structural reforms help sustainability, … The effects of delying the retirement by five years on fiscal gaps Change in underlying primary balance needed to bring debt to 50% of GDP in 2050 Note: The change is from the underlying primary balance projected for Source: Merola, R. and D. Sutherland (2012), "Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations", OECD Economics Department Working Papers, No. 934, OECD Publishing.

19 …improve budget balance, A permanent one-percentage point increase in employment can improve the budget balance by between 0.3 and 0.8 percentage points Source: OECD, Economic Outlook 88 Database and OECD calculations.

20 …raise GDP Difference in the level of GDP in 2050 as compared with baseline scenario for long-term growth Source: OECD Economic Outlook 91 Long-term Database.

OECD’s Going for growth exercise 21

The pace of reforms has remained high overall Action on areas covered by GfG recommendations stands at its highest level since 2005

But uneven across countries 23  Particularly high pace of reforms in euro area countries under financial assistance programmes or direct market pressures  Including in politically-sensitive areas: labour market regulations and social welfare systems  Even controlling for these countries, action on priority is highest  Much more moderate pace of reforms in other euro area countries  In particular those with a current account surplus  But also in countries with highest living standards (US, Switzerland, Norway)  More active reforms in these countries would help achieve rebalancing, both globally and in the EA

Countries reforming most have also consolidated their budget Pace of structural reforms against budgetary consolidation over the past two years

In Europe:  Emphasis on active labour market and social policies  Reforms to foster job creation, hiring and labour mobility, incentives to take-up work  Reduction of barriers to entry in services In the US:  Active labour market policies  Access to quality education and health insurance Going for Growth priorities

In Japan and Korea:  Benefit systems (childcare policies)  Duality in employment protection legislation  In lower-income OECD countries and BRIICS:  Extending the coverage of social protection  Reforming labour market regulation to reduce informality  Improving primary and secondary education Going for Growth priorities

Further reading Arnold, J., A. Bassanini and S. Scarpetta (2007), "Solow or Lucas?: Testing Growth Models Using Panel Data from OECD Countries", OECD Economics Department Working Papers, No. 592, OECD Publishing. doi: / / htmhttp:// htm Employment protection legislation indicators and their impact of employment mploymentprotection.htm mploymentprotection.htm Product market regulation and impact on growth tregulationpmr.htm tregulationpmr.htm Measuring quality of education - PISA