Oecd economic-outlook-june-2016-promoting-productivity-and-equality-a-twin-challenge.pdf

Oecd economic-outlook-june-2016-promoting-productivity-and-equality-a-twin-challenge.pdf

• 1.
  Paris, 1 June2016 OECD ECONOMIC OUTLOOK SPECIAL CHAPTER Promoting Productivity and Equality: A Twin Challenge www.oecd.org/economy/economicoutlook.htm ECOSCOPE blog: oecdecoscope.wordpress.com
• 2.
  Key messages 2 The productivityslowdown and the rise in inequality • Productivity has slowed markedly since the mid-2000s • Income inequality is at its highest level in 30 years • Slowing productivity + Rising inequality = Weak median income growth The policy package I: Macroeconomic policy • Monetary policy cannot work alone • Fiscal policy can strengthen investment, productivity and employment • Higher public investment would expand demand and supply The policy package II: Structural and financial reforms • The pace of pro-competitive reforms has slowed • Priority should be to enhance people’s skills and business dynamism • Financial reform should focus on reducing private-sector leverage
• 3.
  Productivity has slowedmarkedly 3 GDP per hour worked, annualised growth Productivity growth in OECD countries has more than halved since the 1990s
• 4.
  Weak demand contributesto the slowdown 4 Growth of GDP per worker, OECD average Labour productivity has on average grown below trend since 2007
• 5.
  Investment has beensluggish and total factor productivity has slowed 5 Decomposition of trend productivity (GDP per worker) growth, OECD average Trend productivity has slowed: • Before the crisis mainly due to slowing TFP • Since the crisis due to sluggish investment
• 6.
  Slowing innovation anddiffusion may contribute to weak productivity 6 Labour productivity, average of 24 countries The gap between the globally most productive firms and the rest has widened
• 7.
  Wages have grownless than productivity 7 Hourly values, annualised growth, 1990-2013 Many workers have been hit by a “double whammy”: (1) The productivity slowdown, and (2) even weaker growth in wages
• 8.
  Income inequality hasincreased 8 Household disposable income, OECD average Average income growth per year – Top 10%: 1.2% ↔ Bottom 10%: 0.2%
• 9.
  Wage inequality andproductivity dispersion are strongly correlated 9 Correlation vs. causation: Does productivity dispersion boost wage inequality?
• 10.
  10 The productivity slowdown + Therise in inequality What can policy do about it?
• 11.
  Macroeconomic policy 11 Productivity andinequality since the global financial crisis • Weak demand explains half of the productivity slowdown since 2007 • The post-crisis decline in employment has increased inequality • Macroeconomic policy can strengthen productivity and employment Monetary policy • Reliance on unconventional tools has been strong (euro area, Japan, etc.) • Concerns are growing over distortions and effectiveness • Macro policy mix needs to shift to an enhanced use of fiscal policies Fiscal policy • Fiscal stance is broadly neutral in advanced economies • But: Government borrowing costs are very low, even over long horizons • Collective fiscal expansion would increase productivity, income and jobs
• 12.
  Public spending policies 12 Improvinggovernment effectiveness • The quality of public services (education, health, transport) matters • Growth, productivity and equality gain from effective government Priority I: Education • Investing in education improves human capital and productivity • Early childhood, primary education enhances equality of opportunity Priority II: Public investment • Infrastructure in many countries is perceived to be deficient • Reprioritising spending to public investment would improve productivity and leave inequality broadly unchanged
• 13.
  Shifting spending topublic investment can deliver large income gains 13 Long-term income gains from raising public investment in low-investment countries to the level in high-investment countries More public investment increases household income across the distribution
• 14.
  Competition and innovationpolicies 14 Reforms of product markets • Countries have ample scope to facilitate entry and exit of firms • Enhanced product market competition would boost productivity and jobs • Effects on income inequality tend to be small Innovation policies • Innovation and R&D are important to raise total factor productivity • Examples are fiscal incentives for R&D and patent rights protections • Effects on income inequality tend to be small Coherence between policies • Policies need to work together to enhance overall well-being and equality • Product market reforms increase transitions in and out of work • Complementing them with activation policies helps low-income workers
• 15.
  Less regulation ofnetwork industries increases productivity and income 15 Household income gains after a 1% reduction in the OECD regulation index Income rises across the distribution, leaving inequality broadly unchanged
• 16.
  Financial market policies 16 Financeand productivity growth • Finance is important to fund investment and innovation • But: Too high leverage was a key factor in the crisis • Credit supply constraints may exacerbate the investment slowdown Finance and income inequality • Financial expansion tends to increase income inequality • Bank credit goes more to high- than low-income households • Earnings in the financial sector are very high Reforming finance • Further write-downs of non-performing loans would reduce leverage • Faster bank recapitalisations would facilitate the provision of new credit • Reducing too-big-to-fail guarantees would lower bank leverage
• 17.
  The financial sectorwage premium increases along the earnings distribution 17 Average of 18 European countries, controlling for many potentially confounding factors High wage premiums increase inequality and are likely to reduce productivity
• 18.
  Summary 18 Productivity growth hasslowed markedly and income inequality has risen to new highs The combined effect of these two trends yields low rates of income growth for many workers Comprehensive monetary, fiscal and structural policies can tackle the productivity slowdown and the rise in inequality together Collective fiscal expansion, in particular through stronger investment, would increase productivity, income and jobs Structural and financial reforms are important to improve people’s skills, revive business dynamism and reduce financial leverage
• 19.
  19 Disclaimers Disclaimers: The statistical datafor 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. 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.