by Rory O’Farrell, Łukasz Rawdanowicz, and Kei-Ichiro Inaba,  Macroeconomic Policy Division, OECD Economics Department

As asset prices have risen in recent years, so have concerns that monetary policy, and quantitative easing in particular, has increased inequality. Concern has moved from being the preserve of central bankers and the pages of the financial media to entering popular discourse with calls for “People’s QE” in the United Kingdom. However, recent research shows that not only are the impacts via financial channels of such policies on inequality small, they even have the potential to reduce it.

Monetary policy effects on inequality are ambiguous in theory. A fall in interest rates reduces debt servicing costs and returns on financial assets and may increase, reduce or leave unchanged income inequality. The impact depends on the relative size of variable-rate liabilities and interest-paying assets, or the ease at which rates can be re-negotiated, and on differences in the distributions of income, assets and liabilities. Similarly, an increase in asset prices has an uncertain impact on the inequality of net wealth (households’ assets minus liabilities). As poorer households tend to have high debts in relation to assets, their net wealth stands to benefit most from asset price increases.

Interest rate cuts have a small impact on income inequality in advanced economies. Simulations show that the Gini coefficient – a popular measure of inequality – for the income distribution increased in all the countries studied, except the United States, as a result of a 4-percentage point reduction in interest rates. However, this was only a tiny fraction of the overall changes in the Gini coefficient observed during the Great Recession for all the countries except Belgium and Germany (Figure 1). Moreover, these inequality-raising effects of monetary policy could have been partially, or even more than fully, offset by the stabilising effects of monetary easing on employment that benefit low-income workers disproportionally.

Figure 1. Simulated changes in Gini coefficients due to 4 p.p. lower interest rates

Note: Negative changes imply a decline in inequality. Squares mark actual changes in the Gini coefficients for market income between 2007 and 2010.
Source: OECD Income Distribution and Poverty Database; and O’Farrell et al. (2016).

Likewise, asset price changes are unlikely to have had a large effect on net wealth inequality. Even if asset valuations vary by as much as they changed during the Great Recession, it would not alter the Gini coefficients for the net wealth distribution significantly in most of the countries analysed. Moreover, the reversal of asset valuations since 2010 suggests that net effects over the business cycle are even smaller. The muted overall impact of changes in asset prices is in part due to rising house prices generally reducing net wealth inequality and thus offsetting the inequality-raising increase in equity and bond prices.

Interactions between monetary policy and inequality pose communication challenges. Even if cyclical implications of monetary policy for inequality as measured by the Gini coefficient are small, larger losses or gains for very specific and vocal groups tend to attract media attention. This calls for clear explanations of the advantages and disadvantages of various inequality measures and all possible channels affecting the overall net effect. It also needs to be communicated that current effects are likely to be reversed during the monetary policy tightening cycle and that inequality fluctuations would be much larger without monetary policy intervention.

References

O’Farrell, R., Ł. Rawdanowicz and K.-I. Inaba (2016), “Monetary policy and inequality”, OECD Economics Department Working Papers, No. 1281, OECD Publishing, Paris.

by Christophe André,
Senior Economist, Country Studies, OECD Economics Department

The Great recession has revived interest in the links between housing markets, household finance and the wider economy. The meltdown of the US subprime mortgage market was at the epicentre of the global financial crisis, which triggered the recession. Furthermore, in the run-up to the crisis, the United States was far from the only country experiencing a housing price boom. According to The Economist, the global housing boom was the “biggest bubble in history”. Between the mid-1990s and 2008, household debt roughly doubled as a percentage of income in the OECD. While some deleveraging has taken place in a number of countries, like the United States and the United Kingdom, debt levels often remain high. In addition, exceptionally low interest rates are fuelling renewed increases in housing prices and debt build-ups in some countries.

Gross household debt in OECD countries

Per cent of net disposable income, 2013 or latest year available

Source: OECD National Accounts database.

Household debt developments in selected countries

Per cent of net disposable income

High gross household debt may foreshadow trouble for households, the financial system and the wider economy, but cannot stand alone as an indicator of risks. First, the household sector generally has large asset holdings, although their distribution tends to be highly skewed. Second, more than high levels of debt, it is often rapid increases, associated with housing booms, which presage adverse economic and financial developments. These can take many forms. Financial distress can result from a deterioration of lending standards, as illustrated by the meltdown of the US subprime mortgage market. Another source of vulnerability is fragile mortgage financing structures, notably involving excessive reliance on short-term borrowing, as in the case of the collapse of the UK mortgage lender Northern Rock in 2007. Even in the absence of a direct impact of adverse shocks – such as falls in housing prices, drops in household income or increases in interest rates – on the financial system, high household debt may amplify the business cycle, as households adjust consumption to cope with their financial obligations. This is illustrated by the macroeconomic impact of recent falls in housing prices in Denmark and the Netherlands, the two countries with the highest household debt-to-income ratios in the OECD.

Risks can be mitigated by sound micro-prudential regulation and supervision, macro-prudential policies and perhaps in some cases by monetary policy reactions. But a holistic approach to housing issues is needed to achieve at the same time financial stability and decent, sustainable housing conditions for all.

Find out more:

André, C. (2016), “Household debt in OECD countries: stylised facts and policy issues”, OECD Economics Department Working Papers, No. 1277, OECD Publishing, Paris.

by Jean-Marc Fournier,
Economist, Public Economics Division,
OECD Economics Department

Numerous international agreements and free trade areas have reduced trade and foreign investment restrictions dramatically. This is one factor that has boosted international trade, which has risen about one and a half times faster than GDP since the Second World War. Globalisation has made it possible to reap economies of scale and has given access to cheaper goods.

Beyond the explicit barriers to international trade and investment, firms also face national regulatory hurdles. Firms have to deal with numerous specific rules in other countries which can be complex. This complexity has a cost. Simplification and harmonisation of regulations boost trade and FDI.

The OECD collects detailed data on product market regulations that hamper competition, including, for instance, the involvement of the state in business operations, licencing systems or sector-specific regulations (e.g. regulations of telecommunication firms). Regulations that do not discourage competition (e.g. safety requirements applied to all firms) are excluded. These data allow one to look at differences of regulatory settings between country pairs. This reveals that there is a sizeable heterogeneity in regulatory settings across countries (Figure 1).

Figure 1. Product market regulation heterogeneity

Average bilateral heterogeneity, 2013, per cent

Note: The bilateral heterogeneity is the share of answers to the OECD product market regulation questionnaire that differ between pairs of countries; it is computed for each country pair. The US PMR data are available until 2008 only, and hence the United States is not shown in this figure.

Source: OECD, Product Market Regulation database and OECD calculations.

My research shows that firms prefer to invest in a country with a similar regulatory environment. A broad reform package that would cut regulatory differences by one fifth could increase foreign direct investment by about 15%. Such a pace of convergence has been observed between 2008 and 2013 for pairs of countries such as Austria and the Slovak Republic. Regulatory differences in some fields reduce FDI more than others. This is especially the case for antitrust exemptions, regulatory barriers in service sectors, command and control regulations and barriers in network sectors. Belonging to the EU Single Market has a positive effect on foreign direct investment, reflecting the implementation of common area-wide rules. My work also confirms that the stringency of explicit FDI restrictions reduces foreign direct investment, which was also found in many other studies. Last, the stringency of employment protection legislation and the complexity of regulations also have a large negative impact on foreign direct investment.

Reducing regulatory differences and regulatory stringency also boosts trade as shown in this working paper. For instance, a broad reform package that would align product market regulation to the average of the best performers and, at the same time, cut regulatory heterogeneity by one-fifth can increase trade intensity within the European Union by more than 10%. There is also specific evidence that anti-competitive regulations in network sectors such as airlines and telecom reduce trade.

Find out more

Fournier, J.-M. (2015a), “The Negative Effect of Regulatory Divergence on Foreign Direct Investment”, OECD Economics Department Working Papers, No. 1268, OECD Publishing.

Fournier, J.-M. (2015a), “The Heterogeneity of Product Market Regulations”, OECD Economics Department Working Papers, No. 1182, OECD Publishing.

Fournier, J.-M. et al. (2015), “Implicit Regulatory Barriers in the EU Single Market: New Empirical Evidence from Gravity Models”, OECD Economics Department Working Papers, No. 1181, OECD Publishing.

by Jens Arnold
Senior Economist, Head of the Brazil Desk, OECD Economics Department

Brazil has a large and diversified industrial sector, but while parts of it are thriving, others are facing hard times, in part because they are weakly integrated into the world economy. The automotive and the aircraft sectors are two opposite examples of Brazilian industries – one inward-focused and one fully integrated into global trade.

Brazil is the world’s seventh largest automobile producer, but its automotive industry is currently facing severe challenges and production is declining (Figure 1). The industry is heavily protected from foreign competition and Brazil’s car manufacturers have a strong focus on the domestic market and on local content. Only 15% of the production is exported. Despite being the 8^th largest producer of cars in the world, Brazil ranks only 24^th in automotive exports. Brazilian vehicle exports have the third-lowest foreign value added content among the 62 countries in the OECD-WTO Trade in Value Added database (OECD, 2015a).

Figure 1. Production of motor vehicles, in million units, accumulated over 12 months

Source: ANFAVEA website, available at http://www.anfavea.com.br/tabelasnovo.html

While many foreign producers have set up production plants in Brazil in light of the attractive long-term potential of Brazil’s consumer market, most of them have not integrated their Brazilian plants into global value chains (OECD, 2015b). Possibly due to the low exposure to foreign competition, productivity has fallen sharply behind Mexican car manufacturers, who are fully integrated into global production chains and have achieved remarkable gains in global market share. For example, Mexican plants produce 53 cars per worker and year, as opposed to 27 in Brazil, although the cars produced in Mexico are on average smaller models.

A very different story can be told about Brazil’s aircraft industry. Given that production volumes of airplanes are much smaller than for automobiles, economies of scale mandate that firms in this industry focus on the global market. Embraer, originally created in 1969 as a state-owned company, was privatized in the 1990s and has become one of the top global players in the industry since then. Its initial strategy was largely based on buying almost all components internationally for a final assembly in Brazil, although over time it has started to produce parts itself. As a result of its roots, Embraer has always been strongly integrated into global production chains, and imports still account for 70% of its value added. At the same time, exports have grown steadily, performing significantly stronger than motor vehicle exports (Figure 2). By now, Embraer has become the world’s third largest aircraft producer, and it is the global leader in the 70-130 seat aircraft segment, where it accounts for 60% of global deliveries.

Figure 2. Brazil: Exports of motor vehicles and aircraft, 2005=100, in USD

Source: Ministry of Development, Industry and Foreign Trade, Brazil.

References

OECD-WTO (2015a). OECD-WTO Trade in Value Added (TiVA) database

OECD (2015b). OECD 2015 Economic Survey of Brazil, OECD Publishing, Paris

by Volker Ziemann,
Economist, Country Studies, OECD Economics Department

Despite progress in a number of areas, gender equality remains elusive in many OECD countries. Uneven distributions of outcomes and opportunities spread across the entire life cycle of women and men and culminate in sizeable gender pay gaps. Achieving gender equality would not only serve justice and equity but would also improve well-being in areas such as work-life balances, health, education and job satisfaction. Furthermore, it would make economic growth and social institutions stronger and more sustainable.

Austria provides an interesting case study. In many respects, Austria stands out as a formidable example of how institutions and the prevalence of separated gender roles have contributed to sustaining inequality into the 21st century. Study choices have barely evolved and are tilted towards less career-oriented paths for girls; the tax-system subsidises sole-earner family arrangements and part-time work for spouses; insufficient coverage of early childhood education and care institutions and full-day schools makes fulltime work incompatible with child rearing and contributes to one of the lowest fertility rates in the OECD.

As analysed in the 2015 Economic Survey of Austria, the Austrian government has launched a series of initiatives to raise awareness for gender inequalities such as gender budgeting, compulsory income reports for firms with more than 150 employees to depict potential gender pay gaps or the creation of an anti-sexism advisory board within the Austrian Advertising Council.

Yet, more structural and institutional reforms are needed to unveil the full potential of gender equality for the Austrian labour market, improve work-life balance and lift human capital. The OECD identifies necessary changes in the tax-and-benefit system to stop rewarding unbalanced distribution of paid work, investment in high-quality childcare facilities and changes in workplace practices to reconcile work and family lives. Further public interventions and incentives are needed to trigger the necessary changes in the society and break up stereotypes. Reserving a sizeable part, at least a third, of parental leaves to the exclusive use of fathers would be a good start!

This would have significant benefits for growth. Long-term simulations suggest that progress towards more gender equality could raise potential output by as much as 13 percentage points by 2060 in Austria.

Greater gender equality would raise GDP substantially

Source: Author’s calculations

Find out more:

Gönenç, R. et al. (2015), “Austria’s separate gender roles model was popular in the past, but is becoming a constraint for comprehensive wellbeing”, OECD Economics Department Working Papers, No. 1272, OECD Publishing, Paris.

Ziemann, V. (2015), “Towards more gender equality in Austria”, OECD Economics Department Working Papers, No. 1273, OECD Publishing, Paris.

by Oliver Denk,
Economist, Policy Studies

Extreme inequality at the top of the earnings scale has been high and rising in countries around the globe. But who are the select few with the highest labour incomes? And what determines who they are?

That’s the theme of my new working paper on Europe’s 1%, which for the first time puts hard numbers on who the top earners are across 18 European countries. Answers to these questions are important. They inform debates on the causes of inequality and what governments can do to ensure that those who earn the highest incomes deserve them.

The data source I use is the Eurostat Structure of Earnings Survey for 2010. It is the largest harmonised dataset on earnings across Europe, covering 10 million people. The sample covers only employees, not self-employed, though checks suggest that self-employed make little difference to the results.

The analysis shows that the typical person in the top 1% is male, in his 40s or 50s, has a tertiary education degree, works in finance or manufacturing, and is a chief executive, manager or professional.

What determines who gets into the 1%? My paper suggests that two different sets of decisions matter: the choices you make, and the choices your governments make.

People with only secondary education are less likely to be in the 1%. Therefore, going to university improves the chances of earning a very high income.

The industry matters a lot. The average probability of being in the top 1% is 1%, but it is 3.8% for people working in finance, 2.7% for those in the ICT industry, and 2.5% for those in the professional services (see figure). At the other end of the spectrum, education and construction are two sectors for which the chances of earning a top income is low.

So, education and career paths, which to some extent are in everyone’s hands, are important for who is in the 1%. But so can be institutions and policies. Let me highlight this with two examples.

Top earners are 4½ years younger in Eastern than Western Europe. The difference is probably related to the economic transformation of Eastern Europe after the fall of the Iron Curtain. Workers already in the labour market during the 1980s, the last years of communism in the East, have less chance than in the West of having moved up to the top 25 years later.

A distinct feature of the top 1% is the large gender imbalance. The chance of being in the top 1% is much smaller for women, 0.3%, than men, 1.6% (see figure). Germany and Luxembourg have especially few women among top earners. What could be done about it? Comparing countries with one another shows that, where overall female employment is higher, more of the 1% are women. Thus, policies to broaden female participation in the labour market may also promote female representation at the top.

Men in finance have the highest chance of being in the 1%

Note: The panels depict the simple average across 17 (for industry) and 18 (for gender) European countries. In the left panel, public administration is removed from the sample as data for this industry are not available for all countries.

Source: Oliver Denk (2015), “Who Are the Top 1% Earners in Europe?”, OECD Economics Department Working Papers, No. 1274, OECD Publishing, Paris

by Christina Timiliotis, Junior Trade Policy Analyst, OECD Trade & Agriculture Directorate, and Tomasz Kozluk, Head of the Green Growth Workstream, OECD Economics Department

Governments in the OECD and elsewhere must intensify efforts to mitigate pollution levels, if the international agreement of the latest COP 21 – pledging to keep global warming below 2 degrees – is to be more than just a loose promise. Against this background, policy makers need to enforce environmental regulations that oblige firms to account for the impact their actions have on the environment, and increase the price of using the environment as a factor of production. While there is broad support for environmental goals in the first place, support dwindles when compliance with such regulations implies higher production costs.

Efforts to put a cost on pollution have indeed often provoked resentment and resistance by producers and workers who fear to be put at a disadvantage vis-à-vis foreign competitors that are located in jurisdictions with laxer environmental policies. The conventional wisdom that tougher environmental regulations ultimately entail a loss in competitiveness and thus encourage industries to relocate production to a more favorable business environment, is commonly referred to as the “Pollution Haven Hypothesis” (PHH). If real, it can make environmental policy making politically difficult due to voters resistance and ineffective due to leakage. However, in spite of the PHH’s popularity, the evidence behind it is fragmented and to a large extent anecdotal.

The working paper “Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis” attempts to change this by looking at the Pollution Haven Hypothesis  through a new lens, using trade in value added data that more accurately represents today’s trade flows in the context of internationally fragmented value chains.

Scrutinising data across more and less pollution intensive industries in 23 OECD countries and six emerging economies since the 1990s, we find that countries with relatively stringent environmental laws do not suffer from lower exports as a result (see compare your country data viz) . There is however, a small effect on their relative competitiveness across different sectors in the economy. In countries with more stringent policies, exports of pollution and energy intensive sectors, such as steel-making or chemicals are lower than in the absence of stringent environmental policies (Figure 1). However, this is compensated by a corresponding increase in exports in “cleaner” industries like machinery or electronics. Moreover, both the positive and negative effects of environmental regulations on exports of different sectors have been small so far relative to the effects of other factors, such as market size, globalisation, national endowments or trade liberalisation.

Increase in domestic value added in exports 1995-2008, USD billions

Note: The figure shows exports from the three most stringent countries (Denmark, Germany, Switzerland) to BRIICS and vice versa, in billions USD. Pollution intensive sectors are defined according to methodology described in Kozluk and Timiliotis as ISIC rev. 3.1. 2325: Manufacture of coke, refined petroleum products and nuclear fuel; Manufacture of chemicals and chemical products; Manufacture of rubber and plastics products and 2000: Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials. Less pollution intensive sectors are defined as 2933: Manufacture of machinery and equipment n.e.c.;  Manufacture of office, accounting and computing machinery; Manufacture of electrical machinery and apparatus n.e.c.; Manufacture of radio, television and communication equipment and apparatus; Manufacture of medical, precision and optical instruments, watches and clocks; 3637: Manufacture of furniture; manufacturing n.e.c.; Recycling.

In its preface to the General Theory, Keynes said that “the difficulty lies not so much in developing new ideas as in escaping old ones.” A myriad of ideas on how to credibly reduce the incentives to pollute in the long-term already exists. It remains to escape the archaic belief that ensuring environmental protection while maintaining a strong market position is infeasible. Governments must stand up to the environmental challenge and focus on the good design of environmental policies, accompanying framework policies and on the edge they can get from innovation – in order to secure both good environmental and economic outcomes.

Reference:

Koźluk, T. and C. Timiliotis (2016), “Do environmental policies affect Global Value Chains? A new perspective on the pollution haven hypothesis”, OECD Economics Department Working Papers, No. 1282, OECD Publishing, Paris.

Further information:

Environment and trade: Do stricter environmental policies hurt export competitiveness?

Environmental Policies and Economic Performance, OECD Insights blog

by Piritta Sorsa
Head of Division, Country Studies Branch, OECD Economics Department

Norway has been a pioneer in using gender quotas for corporate boards. Gender balance can enrich board decisions with more diverse opinions and broader understanding of client needs (Storvik-Teigen 2010). Some studies show that more gender balanced boards improve return to investment or stock prices (Erhadrt-Werbel-Shrader (2003), Carter, Simkins and Simpson 2003). However, most OECD countries have very few women on corporate boards (Figure) reflecting cultural barriers or perceived lack of candidates.

Share of women board members in the largest publicly listed companies¹

( ) indicates the number of companies on which the data are based for each country.

1. 2014 For EU countries, Iceland, Norway, and Turkey the companies are a selection of those included in the Primary Blue-Chip Index, which is an index that includes large companies headquartered in each country based on market capitalisation and/or market trades. For Australia, Canada, Japan, Switzerland, and United States the companies are selected from various stock-market listings (S&P/ASX 200, S&P/TSX 60, TOPIX Core 30, SMI index, and S&P 500, respectively).

Source: European Commission (2014), Database on women and men in decision-making; Catalyst (2014), Catalyst Census: Women Board Directors 2014

Gender quotas can break the “glass ceiling” (OECD 2015).  The OECD 2016 Economic Survey of Norway brings out three key lessons from its experience on the role of sanctions, the availability of suitable candidates and the impact it has had on attitudes.

Norway’s pioneering gender board quotas only worked with sanctions

Gender quotas were first introduced in some public sector entities in the 1980’s and were extended in 2003 under legislation requiring at least 40% of women on boards of public limited companies (known as ASA), inter-municipal and state-owned enterprises. However, as of 2005 only 17% of board members were female. To reach the target enforcement of the quotas was tightened in 2005 by legislating sanctions, including a threat of dissolution of non-compliant companies (Storvik-Teigen, 2010). This led to a rapid change: the 40% target was reached in 2008. The coverage of the quota was extended to cooperative companies in 2008 and to municipal companies in 2009.

Fears by business of lack of competent female managers were unjustified

Quotas were initially resisted by business on grounds that it would be hard to find qualified women and that therefore the quality of decisions would deteriorate (Storvik-Teigen, 2010). Many considered quotas an unnecessary interference in business, and about a third of the 563 concerned companies delisted upon the introduction of the sanctions. However, these fears have been proven wrong. On average, female board members in Norway have higher educational qualifications than their male colleagues (Bertrand et al., 2014). Some studies (Storvik-Teigen 2010) have also shown that female presence at boards has led to less layoffs in downturns, but with some trade-offs with profitability. The process was also facilitated by government policies of creating a databank of qualified women and training programmes for qualified female candidates.

Attitudes have changed and gender board quotas are now widely supported

The quotas are now considered a success in enhancing diversity and better business decisions. However, the impact on enhancing women’s careers more generally has been limited (Bertrand et al., 2014), although more positive effects may emerge in the coming years.

Related material

OECD 2016 Economic Survey of Norway

OECD Gender Portal

Bertrand, M., S. Black, S. Jensen, A. Lleras-Muney, (2014),  “Breaking the Glass Ceiling? The Effect of Board Quotas on Female Labor Market Outcomes in Norway”, NBER Working Paper No. 20256, June 2014.

Storvik, A. and Teigen, M. (2010), “Women on Board: The Norwegian Experience”, Fredrich Ebert Stiftung, International Policy Analysis, 2010.

Niclas L. Erhardt, James D. Werbel and Charles B. Shrader (2003) ,  Board of Director Diversity and Firm Financial Performance, Corporate Governance: An International Review, 2003, vol. 11, issue 2, pages 102-111

D, Carter, B. Simkins and W. Simpson (2003) Corporate Governance, Board Diversity, and Firm Value, Financial Review, Volume 38, Issue 1, pages 33–53, February 2003

By Alain de Serres, Head of the Structural Surveillance Division,
OECD Economics Department

Our Going for Growth report released last week at the margin of the G20 Finance Ministers and Central Bank Governors meeting came out at the time when near-term global growth prospects are again clouded. Emerging-market economies are losing steam, world trade is slowing down and heightened uncertainties are holding back investment in both emerging and advanced economies. Durably weak investment, combined with challenges in the way innovation drives and diffuses throughout our economies, have resulted in slow productivity gains.

Getting back to healthy and inclusive growth calls for comprehensive and coherent 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 will only yield results if there is enough demand.

The report reviews the main growth challenges faced by OECD countries and major non-OECD countries and takes stock of progress over the past year or so in adopting structural policy reforms to address them. 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, it has been steadily declining since 2011-12. In addition, countries with ambitious reform programmes face significant political challenges and the risk of losing momentum. Progress has been made on the G20’s 2104 Brisbane commitment to implement reform strategies to lift their collective GDP by 2 per cent by 2018, but much remains to be fully implemented.

About 50 % of the Going for Growth recommendations have been implemented or are in the process of implementation

In the current context of clouded prospects and persistently weak demand, it is important that structural reform packages that promote long-term jobs and productivity growth focus as well on maximising short-run gains. The Going for Growth report indeed reviews the issues and evidence on the impact of reforms introduced in a difficult economic conjuncture. The lessons drawn offer valuable insights on the type of reforms most likely to succeed in such circumstances as well as on specific measures to increase the short-term payoff even in a context of weak demand. For example, reform strategies that put more weight on infrastructure spending, on facilitating the entry of new firms in services, or on 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. It is important in such a context that all countries contribute collectively to reform efforts and to support demand, lest the prospects of a return to healthy and inclusive growth, both at home and in the global economy, will be pushed further back.

See also: Resilience of Economies to Exogenous Shocks, OECD Insights Blog

By Gabor Fulop, Analyst, & Rafal Kierzenkowski, Senior Economist
The Netherlands Desk,  Country Studies, OECD Economics Department

The ongoing refugee crisis in Europe has particularly affected the Netherlands. Asylum requests surged in 2015 to nearly 60 000 (Panel A), more than three times the yearly average of 2010-14. This is a significant challenge for the authorities, who need to provide decent housing and help these people finding a job for the time they will stay in the Netherlands as refugees, which could be much longer than expected. Getting work is key for refugees to develop social contacts and economic independence, and acquiring new skills could be helpful for those refugees who eventually return to their own country. Therefore, good policies to facilitate the labour market integration for migrants are critical.

The past record of integrating immigrants is mixed. Although at about the OECD average, the skills of first- and second-generation immigrants are well below those of natives and below those of immigrants in the best performing OECD countries (Panels B and C). In parallel, the gap in labour force participation—those who have jobs or are looking for a job—between first-generation immigrants and natives is the largest in the OECD (Panel D). Many policies that would support job prospects of immigrants would also benefit refugees. Studies of past inflows of refugees show that the proportion of those of working age participating in the labour market is around 45% after being five years in the Netherlands (Vluchtelingenwerk, 2014), which is much lower than the 80% of natives.

Skills and labour market outcomes of immigrants are weak

Source: Statistics Netherlands (2016), “Asylum requests” in Population, Statline, January; OECD (2013), PISA 2012 Database; OECD (2013), OECD Skills Outlook 2013: First Results from the Survey of Adult Skills; and OECD (2015), “Employment, unemployment and participation rates by sex and place of birth“, OECD International Migration Statistics (database), October.

The 2016 Economic Survey of the Netherlands  highlights the following reforms for improving the labour market integration of immigrants, which could also benefit refugees:

1. Ensuring high equity of compulsory education

Raising the quality of early childhood education and care would help immigrant children, including by improving language proficiency. Stepping up training would provide teachers with the tools to work with students with disadvantaged backgrounds, and reflecting such skills in wages would attract more qualified teachers. Raising student mobility between tracks at secondary schools would foster the development of skills, including for students with immigrant background, and would avoid those with low socio-economic background being trapped in low-qualified jobs.

2. Recognising and upgrading skill sets

Better recognition of foreign qualifications and informal skills would help immigrants to find work that matches their skills. Creating programmes that combine work experience and on-the-job training beyond formal education, especially for immigrants with low qualifications, would help them to demonstrate and upgrade their informal skills. Developing language courses would also support access to jobs.

3. Promoting job search and recruitment

Further lowering the cap on severance payments would make permanent contracts more attractive to employers, which would help refugees and immigrants to find jobs and to support their skills because permanent work tends to come with more skill development. The government has recently increased the earned income tax credit for lower income-earners, which is welcome. Further reduction of effective tax rates on labour income would sharpen incentives to get a job. Reinstating an equal employment policy would help to overcome discrimination on the basis of race or ethnicity.

Whereas the refugee crisis poses an immediate challenge, it also provides an incentive to improve labour market integration policies of immigrants. This would result in better job prospects benefiting all parties involved, the migrants and the Netherlands.

References

Vluchtelingenwerk (2014), IntegratieBarometer 2014 (Integration Barometer 2014).

OECD (2016), OECD Economic Surveys: Netherlands 2016, OECD Publishing.