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 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 Nicolas Ruiz,
Economist, Structural Surveillance Division, Policy Studies Branch
OECD Economics Department

Concerns about the distribution of income weigh heavily in the public policy debate and the economic crisis has added urgency to deal with the policy issues related to inequality. But if the current challenges are clear, there is less common understanding about the definition and measurement of income inequality. What may be seen as a straightforward concept to measure turns out in practice to be hard to quantify in a reliable way.

Until the last decade, household surveys were pretty much the exclusive source of official statistics to guide policy reflexions on inequality. A consensual finding from these sources, used by governments and international organisations, is that income inequality has been steadily rising between the mid-1980s and the late 2000s, but at a much slower pace after the mid-1990s. During the crisis years, recent evidence point also to stable inequality levels on average.

But a wave of research initiated by Thomas Piketty, and which concentrates almost exclusively on the top of the income ladder, has in fact shown that the share of total income held by the very richest households actually rose faster in the 1990s than in the 1980s. These findings, based however on non-official sources, indicate that income inequality has actually grown more rapidly over the last fifteen years than previously thought, and that following the crisis there has been a significant upsurge in top incomes.

These new findings sparked a debate about the real extent and trends on inequality. It also left economists with a patchwork of data. Inequality figures drawn from household surveys tend to measure income dispersion on a comprehensive and representative portion of the population, say the 99%, but are not able to capture properly the very top due to various shortcomings. Yet, it is in this portion of the distribution that most of the changes in inequality seem to have occurred over the last fifteen years.

The derivation of top incomes figures depend crucially on the use of the Pareto “iron law” of income distribution, which assumes that the percentage of a given income decreases in proportion as the income threshold is raised. Originally formulated by the economist Vilfredo Pareto more than one century ago, this law has passed the test of time and is used in various branches of economics. It can also be applied to official sources to correct for missing top incomes.

What happens if we do so, which can be thought as measuring inequality on the 100%? Unsurprisingly, it results for most countries in an increase of the level of inequality. What is perhaps more surprising is the magnitudes implied, which are strikingly large.  Across OECD countries the Gini coefficient (a staple for measuring inequality), measured on the whole population from the poor to the very rich, the 100%, was in 2011 on average 6 percentage points higher than official statistics based on household surveys, moving from 0.31 to 0.37. Similarly, the ratio of the mean income of the richest 10 per cent of the population to that of the poorest 10 per cent rises from 10 to 15.

Inequality levels are larger when accounting for the whole population

Gini coefficient

Ratio of mean incomes of the richest to the poorest 10%

Source: Nicolas Ruiz and Nicolas Woloszko (2016), “What do household surveys suggest about the top 1% incomes and inequality?”, OECD Economics Department Working Papers, No 1265, OECD Publishing, Paris.

So when we connect the dots on income inequality and adjust official sources for the missing top incomes, it appears that we are living in more unequal economies than is generally documented. Does it matter? Well, a lot. Consider the example of the recovery years in the United States. According to the Census Bureau, between 2009 and 2012 the Gini coefficient on pre-tax and transfers income remains fairly stable around 0.47. But according to recent figures computed by Thomas Piketty and his team, the top 1% captured 95% of real national income growth during the same period. Clearly, policy roadmaps could radically differ when based on these two separate sources. In our efforts to make growth more inclusive, an encompassing view of inequality taking on board all the segments of the populations, is essential to guide policy discussions.

See also: Structural Policies and Distributional Consequences | OECD Insights Blog

By Antoine Goujard,
Economist, Country Studies, OECD Economics Department

Strengthening competition would have positive effects on French competitiveness, employment, equity and well-being. The OECD (2015a) estimated that five sets of measures in the “Macron Law” – the reform of regulated professions, the extension of Sunday and evening trading, the opening-up of passenger coach transport, the simplification of redundancy rules and easier procedures for obtaining a driving licence – could potentially increase France’s GDP by 0.4% over 10 years. Streamlining entry requirements in some professional occupations and easing entry conditions for micro-enterprises, as recently announced, would also be good moves. However, there is scope to go much further and increase synergies with labour market reforms (OECD, 2014, 2015a and 2015b).

Over the last decade, France’s export market share losses have been slightly greater than those experienced by the other main euro area countries (Panel A). In particular, French export growth was relatively slow compared to its export markets before the global financial crisis in 2008 (Panel B). French wages have increased faster than labour productivity, and unit labour cost growth has exceeded the corresponding German rate (Panel C). This trend is mainly explained by developments in economic sectors that are partly sheltered from international competition (Panel D). Strengthening competition in those sectors would benefit all industries that use them as inputs in their production process and improve the cost-competitiveness of French exporting firms, their profit margins and investment capacities.

Changes in export market shares and unit labour costs

1.Difference between export growth and export markets’ growth, in volume terms (with export markets as of 2010).
Source: OECD (2015), Economic Outlook 96 and Productivity databases.

The OECD analysis highlights three main areas of reforms to improve competition, productivity and employment:

1. Simplify the business environment.

Streamlining administrative procedures, including the tax system and government support for firms, together with improving public procurement practices, would allow substantial productivity gains and growth. The guidelines issued by the OECD (2011) should be used to systematically review existing regulations from a competition perspective according to a set schedule, and measures should be implemented rapidly.

2. Continue to open up regulated professions.

For architectural, accountancy and legal services, barriers to entry and controls on practice in France were among the highest in the OECD in 2013. Streamlining entry requirements, opening further the capital ownership and increasing or lifting numerical quotas for selected professions would strengthen productivity and allow economies of scale and scope.

3. Ease further retail regulations.

The new rules governing urban commercial development and Sunday opening remain unnecessarily complex. Urban zoning rules are still a constraint for large stores, and heterogeneous Sunday openings’ regulations distort competition and limit employment. Moreover, the sales of certain products, such as over-the-counter drugs, and the periods during which clearance sales can be held, are still tightly controlled.

Find out more:

Goujard, A. (2015), “Enhancing Competitiveness, Purchasing Power and Employment by Increasing Competition in France”, OECD Economic Policy Papers, No. 14, OECD Publishing, Paris.
OECD (2011), “Competition Assessment Toolkit”, OECD Publishing, Paris.
OECD (2014), “France, Les réformes structurelles : impact sur la croissance et options pour l’avenir”, OECD Publishing, Paris.
OECD (2015a), “France, Évaluation de certaines mesures de la Loi pour la croissance, l’activité et l’égalité des chances économiques et perspectives de futures réformes”, OECD Publishing, Paris.
OECD (2015b), “OECD Economic Surveys: France 2015”, OECD Publishing, Paris.