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Chile: How can growth be made more inclusive?

By Jens Matthias Arnold and Paula Garda, OECD Economics Department

Chile’s economy has been a poster-child of Latin America for a long time. As the new Economic Survey for Chile highlights, its solid institutions have delivered macroeconomic stability and rising living standards. Per-capita incomes have more than doubled since the 1990s and are among the highest in the region. But despite all this remarkable progress, cracks have emerged on the surface. In October 2019, widespread social unrest paralysed the country and revealed deep-rooted discontent with inequalities of economic conditions and opportunities.

After the social unrest, the Covid-19 pandemic took a steep toll on lives and livelihoods, and led to the sharpest contraction of economic incomes in 40 years. In 2021, the economy recovered swiftly on the back of exceptionally strong policy support, and eventually overheated significantly, as domestic demand pushed inflation well above target. Fiscal policy is rightly consolidating this year, including a strong reduction of public expenditure. The Russian aggression on Ukraine and global supply shortages in 2022 exacerbated inflationary pressures, with rising food and energy prices pounding hard on many families as inflation rose above 14%. Monetary policy reacted swiftly and forcefully, but the monetary policy stance will have to remain restrictive for some time to bring inflation back to the target and to firmly re-anchor inflation expectations.

In the face of these extraordinary shocks, Chile’s institutions have been resilient and helped to avert worse outcomes. The social unrest of 2019 eventually gave rise to an orderly and democratic process of rewriting the country’s constitution. In a national referendum, a majority of Chileans voted in favour of this step. A first new draft constitution was rejected in a second national referendum in September 2022, but another process for drafting a new constitution is being discussed.

Significant underlying growth and inequality challenges will have to be addressed over the next years. A long-standing process of income convergence to advanced economies has gone into reverse since 2014 (Figure 1). Productivity has been stagnant or even decreasing, and boosting it has now become a key priority. Investment in new technologies has been weak, and important parts of the economy could benefit from stronger competitive forces, as cumbersome regulations hold back new firm entry and investment.

Figure 1. Income convergence has reversed

Source: OECD, Productivity database; World Bank, WDI.

Besides boosting the engines of income growth, pressing social needs will require a growing attention to how incomes and opportunities are distributed. The quality of public education and health services needs to be improved to narrow the gap vis-à-vis private institutions. The pandemic has also highlighted significant gaps in social protection, particularly for the most vulnerable households. Ensuring some basic social protection coverage for formal and informal workers alike, while simultaneously reducing the cost of formal employment, is a key challenge. Only by addressing social protection and informality simultaneously will Chile be able to break the vicious circle where informal workers not entitled to most social protection benefits while the labour charges that finance these benefits raise the costs of creating formal jobs.

Few people have adequate old-age pensions, owing to low contributions and contribution gaps due to informal employment. Pension replacement rates were already low before the pandemic, but many pension accounts are now depleted following three rounds of extraordinary withdrawals during the crisis. A recently established universal basic pension is a key milestone: it will significantly improve pension benefits, particularly for many low-income earners. But future pension reforms should pay particular attention to formalisation incentives, while raising pension replacement rates. Income-support programmes for vulnerable households are highly fragmented, and unifying social assistance programmes into a single cash benefit scheme would allow increasing coverage and benefits.

Education is key for reducing inequalities and raising productivity at the same time. Learning outcomes remain well below the OECD average and pandemic-related school closures have exacerbated these longstanding challenges, as fewer students from vulnerable backgrounds used digital tools to remain connected. Expanding access to quality early childhood education would bridge early and often decisive gaps in cognitive and social progress and allow more women to work. Working conditions for teachers fall short of OECD average standards, with lower pay and longer working hours.

The small size of Chile’s public sector limits its ability to provide better public services and opportunities for all, and to reduce inequalities. Tax revenues of only 21% of GDP are insufficient to meet rising social demands while preserving necessary public investment in infrastructure, education and health (Figure 2). Personal income taxes, which only 20% of Chileans pay, are one explanation behind this low tax collection. Raising public revenues by several percentage points of GDP, as currently planned by the authorities, is ambitious but clearly within reach through a comprehensive tax reform.

Figure 2. Tax revenues are low

Note: LAC is a simple average of Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico and Peru.
Source: OECD, Global tax revenue database.

As Chile embarks on this path of reforms, many decisions are now being taken that are likely to shape the future of its society and economy for years to come. These reforms are an excellent opportunity not only for raising future incomes, but also for making future growth more inclusive and providing better opportunities for all Chileans, as discussed in the 2022 OECD Economic Survey of Chile.

Reference

OECD (2022), OECD Economic Surveys: Chile 2022, OECD Publishing, Paris, https://doi.org/10.1787/311ec37e-en.




Improving economic opportunities for all in Belgium

By Nicolas Gonne and Müge Adalet McGowan, OECD Economics Department.

Belgium has low income inequality overall, thanks to extensive tax and transfer policies and strong institutionalised social dialogue. However, as in other OECD countries, there is scope to improve equality of opportunities. Indeed, Belgium’s good overall performance regarding income distribution hides an unequal access to life chances, with considerable disparities according to, notably, parental background and country of origin.

Improving economic opportunities for all in Belgium would promote well-being and potential growth by better allocating talents, but also help alleviate fiscal sustainability challenges by reducing the need for redistribution. Based on new OECD evidence from survey microdata (Périlleux et al., forthcoming), the latest Economic Survey of Belgium identifies three key barriers to equal opportunities: low labour market transitions, inequity in compulsory education and a lack of affordable housing. The Survey discusses policies that can tackle these barriers, with a particular focus on the situation of vulnerable groups, such as the low-skilled, people with a migrant background and single mothers. As competencies concerning the labour market, education and housing spread across different levels of government, some recommendations are more relevant to specific regions and communities according to their policy needs and priorities.

Improving the labour market outcomes of vulnerable groups

Important reforms have contributed to increasing the participation of low wage earners and older workers in Belgium. Yet, employment gaps remain particularly large for disadvantaged groups, such as non-EU migrants, the low educated and people with disabilities (Figure 1), in part reflecting weak digital skills and low participation in training. Lifelong learning programmes and actors involved should be streamlined and vulnerable groups prioritised for face-to-face career guidance, as complexity is particularly detrimental to their participation.

Figure 1. Employment gaps are particularly large for disadvantaged groups

Note: Employment gap defined as the difference between the employment rate of prime-age men (aged 25-54) and that of the group, expressed as a percentage of the employment rate of prime-age men (more details).
Source: OECD calculations based on OECD Employment database, OECD International Migration database, OECD Education Database and OECD Family database.

The planned introduction of the individual training account, as recommended in the previous Economic Survey of Belgium, is a major step in the direction of increasing lifelong learning efficiency and inclusiveness, but successful implementation requires the provision of high quality training in areas of skill needs and coordination across regions. Moreover, the use of statistical profiling tools for delivering employment services to target vulnerable groups should be expanded. As low employment rates also reflect gaps in individual support for sickness and disability beneficiaries, individual placement and support programmes should be scaled up further, conditional on their evaluation. Finally, introducing in-work benefits for low-wage workers with children would strengthen their work incentives, as low-income single parents and second earners with children face among the highest participation tax rates in the OECD.

Enhancing equal opportunities in compulsory education

Belgian students’ overall academic performance is at par with peer countries. However, student achievement strongly depends on parental background (Figure 2), leading to large disparities across schools and programmes due to a cumulative process of socio-economic self-sorting and academic selection. Schools are incentivised to diversify their student intake, but not to achieve good educational outcomes for weaker students. Reliable performance indicators and other data on successful study progression should be used to inform school funding based on educational improvements made with disadvantaged students. Moreover, schools should be further encouraged to organise programmes across the general and vocational tracks and to enable transfers between them, as low mobility between tracks reduces the prospects of students from disadvantaged backgrounds. Finally, stronger incentives and training for new teachers can reduce attrition and attract teachers to schools with a high concentration of disadvantaged pupils, through strengthening induction programmes and rewarding teaching in disadvantaged schools with financial incentives or improved and stable career prospects.

Figure 2. Student achievement strongly depends on parental background

Note: OECD calculations based on regressions of PISA test scores in reading on the index of economic, social and cultural status (ESCS).
Source: OECD (2019), PISA 2018 Results (Volume II): Where All Students Can Succeed, OECD Publishing, Paris.

Promoting affordability and quality on the housing market

In Belgium, housing conditions overall are among the best in the OECD according to the OECD Better Life Index. However, access to affordable housing has become increasingly challenging for low-income households, who bear a high burden from housing costs (Figure 3). The supply of social housing is too low, especially in large cities, such as Brussels, and price differentials with the private housing market hinder moves, thereby distorting work incentives. The regions should expand rental allowances to cover low-income private market tenants, while proceeding to increase the social housing stock.

Figure 3. Low-income households bear a high burden from housing costs

Note: Households on the private rental market; low-income households belong to the bottom income quintile; overburden is more than 40% of disposable income on total housing costs (more details).
Source: OECD Affordable Housing database.

References

Adalet McGowan, M.  and N. Gonne (2022), “Addressing medium-term fiscal challenges to address future shocks in Belgium”, Ecoscope, Blog posted on 14 June 2022.

Gonne N. (2022), “Improving economic opportunities for all in Belgium”, OECD Economics Department Working Papers, No. 1722, OECD Publishing, Paris,
https://doi.org/10.1787/662d50d9-en

OECD (2022), OECD Economic Surveys: Belgium 2022, OECD Publishing, Paris, https://doi.org/10.1787/01c0a8f0-en.

OECD (2020), OECD Economic Surveys: Belgium 2020, OECD Publishing, Paris, https://doi.org/10.1787/1327040c-en.

Périlleux, G., N. Gonne, S. Cassimon and M. Adalet McGowan (forthcoming), “Upward income mobility and vulnerable households in Belgium: Evidence from survey microdata”, OECD Economics Department Working Papers, OECD Publishing, Paris.




The Slovak labour market during the pandemic – who is at risk and how to protect all workers?

by Gabriel Machlica, OECD Economics Department

The COVID-19 pandemic triggered the most severe economic recession since World War II, causing enormous damage to people’s health, jobs and well-being. The Slovak economy is expected to decline by more than 11% in 2020 if a second wave of infections requiring renewed lockdowns hits before the end of this year (OECD, 2020a). The pandemic could lead to lasting demand changes and structural shifts in the economy. Real per capita income will fall to the level of 2015, implying a loss of five years of income growth. The unemployment rate will reach almost 10% this year. Around 100 thousand people could lose their jobs, with vulnerable workers at risk to bear the brunt of the crisis. In Slovakia, these high-risk groups include (i) the non-standard workers, particularly the self-employed and the temporary workers, (ii) the marginalised Roma community and (iii) young people. Well-targeted labour market activation policies should be coupled with a strong social safety net, to mitigate the inevitable adjustment costs of moving towards new jobs.

Who is at risk?

Non-standard workers are vulnerable to the loss of income as a result of the widespread shutdown. Since March, approximately 26% to 40% of Slovak workers have been directly affected by containment measures (NBS, 2020; OECD, 2020c). The most affected sectors were tourism and those services involving contact between consumers and service providers. In this respect, non-standard workers are particularly vulnerable, as they have less protection, they are less likely to receive any form of income support during out-of-work periods than standard employees, and when they do receive benefits they are often significantly less generous than for standard employees (OECD, 2019a).

In Slovakia, non-standard workers accounted for one third of workers directly affected by containment measures, most of them self-employed (Figure 1). Over the last decade, the favourable tax treatment of self-employed workers led to an increase in the number of regular employment contracts disguised as self-employment contracts (Remeta et al, 2015). The share of own account self-employed workers who earn most of their income from just one client is the highest in the OECD (OECD, 2019a). The other group at high risk are temporary workers, particularly the workers with contracts of agreement for work performed outside an employment relationship, so-called ‘work agreements’. They have been significantly affected by the initial impact of the crisis (IFP, 2020). These groups are particularly vulnerable as their dismissal is less costly for employers and leaves them with less protection compared to standard workers.

Source: OECD (2020), “Issue Note 4: Distributional risks associated with non-standard work: Stylised facts and policy considerations”, in Issues notes on macroeconomic and structural policy issues related to the COVID-19 outbreak, OECD Publishing, Paris, https://doi.org/10.1787/7f54e942-en.

The Roma community is highly vulnerable to economic shocks. Roma account for almost one-tenth of the population in the Slovak Republic. Their labour market outcomes are much weaker compared to the general population, but have been considerably improving in the last couple of years (Machlica et al. 2019). However, they remain at particular risk during a downturn as they are mostly low-skilled and work in seasonal, temporary jobs which are much more affected by the economic cycle. Indeed, their employment reacts much more strongly to the economic cycle (Figure 2). In addition, many Roma work in the informal economy, which increases their income insecurity, as they are not entitled to unemployment benefits when they are out of work (Gatti et. al, 2016). All these factors place Roma at a higher risk of falling into poverty when faced with a health or employment shock. This is a significant concern as the vast majority of Roma have been at risk of poverty even before the crisis and almost one-third was living in households where at least one person went to bed hungry in the past month (Machlica et al. 2019).

The crisis can significantly worsen the labour market prospects of youth as the initial labour market experience can have a profound influence on later working life. This year’s graduates will leave schools and universities with poorer chances of finding employment or work experience. This is a particular concern because of scarring effects that may lead to long-lasting negative labour market outcomes (Bell and Blanchflower, 2011; Helbling and Sacchi, 2014). Young people indeed appear most severely affected by the crisis as they generally work in less secure jobs, and are overrepresented among workers in hard-hit industries such as accommodation and food services (OECD, 2020b).

Protecting all workers

The Slovak government has rightly put in place a number of measures in response to the COVID-19 crisis, including incentives to preserve existing jobs, but the take up was much lower than in other OECD countries (Figure 3). These job retention schemes can help limit increases in unemployment and promote a quicker labour market recovery by reducing costs of matching employers to employees. However, this support should not be indefinite as it hampers the necessary reallocation of workers to new jobs (OECD, 2020a). Consumers may emerge from lockdown with new spending habits requiring new jobs, and the long-term preservation of existing jobs may not be efficient. The longer the recovery from the crisis takes, the more should the policy focus shift from “protecting jobs” towards “protecting workers”, providing them with expanded unemployment insurance and an effective activation framework to improve their employability. Strong activation policies can help mitigate some of the inevitable adjustment costs of moving towards new jobs.

Vulnerable groups require special attention. First, the government should ensure adequate social safety nets to avoid the risk of some groups falling through the cracks of existing social protection system as outlined in a recent OECD report (OECD, 2020d) In the medium term, there is a need to enforce a clear distinction between self-employed and employee status. Many OECD countries are tackling false self-employment by reducing incentives for firms and workers to misclassify employment relationships, putting in place tests and criteria for assessing employment relationships and increasing the capacity of labour inspectorates to monitor and detect breaches (OECD, 2019a).

A strong social safety net should be coupled with an extensive activation framework, which in the case of the Roma community should reflect their specific constraints such as poor health, housing and transport issues, indebtedness or limited availability of childcare. Tailored measures should offer a mix of training, counselling and mentoring programmes. Collaborating and outsourcing some of these services to non-governmental providers with a good track record of high-quality support for the Roma can help ease capacity constraints of the Public Employment Services. The OECD report on the social integration of the Roma in Slovakia suggests that more coordinated interventions in different policy areas are needed to avoid further exclusion of the Roma, as interventions in one area will not work without others (Machlica et al. 2019). For the young unemployed, training complemented by subsidies to private employers offering on-the-job training can improve skills and employability (OECD, 2019b). For example, Australia and Denmark as part of its economic response to COVID-19 have introduced wage subsidies to help companies maintain or expand their apprenticeship and in-firm training programmes (OECD, 2020b).

References

Bednarik, M., S. Hidas and G. Machlica (2019), “Enhancing the social integration of Roma in Slovak Republic”, OECD Economics Department Working Papers, No. 1551, OECD Publishing, Paris, https://doi.org/10.1787/197eb309-en.

Bell, D. and D. Blanchflower (2011), “Young people and the Great Recession.” Oxford Review of Economic Policy, Vol. 27/2, pp. 241-267

Gatti , R., S. Karacsony, I. Sandor, K. Anan, C. Ferré and C. de Paz Nieves (2016), Being Fair, Faring Better, Promoting Equality of Opportunity for Marginalized Roma, World Bank, Washington, DC

Helbling, L. and S. Sacchi (2014), “Scarring effects of early unemployment among young workers with vocational credentials in Switzerland”, Empirical Research in Vocational Education and Training, Vol.6/12, http://link.springer.com/article/10.1186/s40461-014-0012-2.

IFP (2020), “Trh práce v karanténe“ Komentár 2020/10, Institute of Finacial Policy, Ministry of Finance of the Slovak Republic, 2020

NBS (2020), “Ekonomické dôsledky uzavretia odvetví s intenzívnym osobným kontaktom”, Analytický komentár č. 81, 4. mája 2020,   https://www.nbs.sk/_img/Documents/_komentare/AnalytickeKomentare/2020/AK81_Koronavirus_Obmedzenia_odvetvi_s_intenzivnym_kontaktom.pdf

OECD (2020a), OECD Economic Outlook, Volume 2020 Issue 1, https://doi.org/10.1787/0d1d1e2e-en.

OECD (2020b), OECD Employment Outlook 2020: Worker Security and the COVID-19 Crisis, OECD Publishing, Paris, https://doi.org/10.1787/1686c758-en.

OECD (2020c), “Distributional risks associated with non-standard work: Stylised facts and policy considerations”  Chapter  English 03 Jul 2020  OECD  in OECD Economic Outlook, Volume 2020 Issue 1

OECD (2020d), “Supporting livelihoods during the COVID-19 crisis: Closing the gaps in safety nets”  OECD Publishing, Paris,http://www.oecd.org/coronavirus/policy-responses/supporting-livelihoods-during-the-covid-19-crisis-closing-the-gaps-in-safety-nets-17cbb92d/

OECD (2019a), OECD Employment Outlook 2019: The Future of Work, OECD Publishing, Paris, https://doi.org/10.1787/9ee00155-en.

OECD (2019b), OECD Economic Surveys: Slovak Republic 2019, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-svk-2019-en.

Remeta, J., et al. (2015), “Moving Beyond the Flat Tax – Tax Policy Reform in the Slovak Republic”, OECD Taxation Working Papers, No. 22, OECD Publishing, Paris, https://doi.org/10.1787/5js4rtzr3ws2-en.




Reviving Italy’s Growth

by Mauro Pisu and Tim Bulman, Italy Desk, OECD Economics Department

In Curno, 50 km north east of Milan, is the headquarters of Brembo, the Italian company supplying brakes for Teslas and Ferraris as well as for mass market cars and motorcycles. Founded in 1961, its 255 employees generate over USD 3 billion of revenue from production facilities across 15 countries.

1500 km away,
in Sicily’s south-east, Gaetana Jacono runs the Valle dell’Acate winery. She is
bringing to six generations of wine making tradition new production
technologies and distribution approaches that are developing exports to large
new markets.

Enterprises like Brembo and Valle dell’Acate have helped
Italy in recent years gradually recover from its extended recession. These are
mostly medium sized enterprises that are highly productive and have grown
activity and created jobs though investment and exports, supported by
government policies such as the Industry 4.0 programme or labour market and
education reforms.

But Italy’s recovery stalled in late 2018, before
Italy could reverse the deep losses in incomes and well-being suffered during
the extended recession. Overall, income per capita today is near its level in
2000, and economy-wide productivity has been stagnant. This lack of progress
has seen poverty rates rise, especially among the young and families. The
OECD’s latest projections are for GDP to contract by 0.2% in 2019 and to expand
by 0.5% in 2020.

What will it take to restart and extend Italy’s
recovery?

A clear multi-year reform programme to boost employment and productivity, while reducing steadily public debt, would lift average annual growth rates and improve inclusiveness. This is among the key policy insights of the OECD’s 2019 Economic Survey of Italy, launched on 1 April 2019 by the OECD Secretary General and Italy’s Minister of Finance. Compared current polices, this reform programme would raise growth rates by about 1.5 percentage points by 2030, expand employment and reduce inequalities.

Increasing productivity growth is key. Boosting productivity
will require enhancing competition in markets that are still protected, such as
professional services and local public services; raising innovation and
business dynamics, including through strengthening targeted incentives connected
to the Industry 4.0 plan; removing incentives for SMEs to stay small and
obstacles hampering their growth; and completing the reform of insolvency
regime.

Among the reforms proposed in the Survey, those concerning the efficiency of public administration
and justice system would have the largest impact on GDP growth by strengthening
the rule of law, thus supporting investment and productivity growth. The
expansion of active labour market programmes and reducing social security
contributions would also generate large benefits by boosting employment and
social inclusion.

Reducing the public debt ratio by steadily raising the
primary budget surplus to above 2% is essential to address the risk to the
broader economy of the high public debt ratio. Lower interest rates have
reduced interest payments on the public debt to a record low of 3.5% of GDP in
2018, which is however near what Italy spends on education.

Italy can raise the primary budget surplus by incorporating in the annual budget through and effective spending reviews that help rationalise current spending by reducing waste and reallocating resources towards more effective programmes. Closing the early retirement scheme introduced in 2019 would free resources to boost employment and opportunities for young people in addition to improving inter-generational equity. Implementing this programme would help Italy’s successful enterprises develop and new enterprises to follow their path, generating opportunities for Italians across the country. A future blog will discuss how this reform programme can address the large disparities between the regions such as those around Brembo’s headquarters and those around Valle dell’Acate.

References
OECD (2019), OECD Economic Surveys: Italy 2019, OECD Publishing, Paris.




Finland: growing and reforming, but no time for complacency

By Christophe André and Jon Kristian Pareliussen, OECD Economics Department

After a long period of lacklustre economic performance, robust growth has resumed. The Finnish economy suffered a series of sizeable adverse shocks alongside the global financial and economic crisis, facing major difficulties in the electronic and forest industries, in addition to a severe recession in Russia. Sound fundamentals and policy settings helped weather the impact of those shocks, and by early 2017 the economy had regained strong momentum. The recovery is broad-based across economic sectors, employment is picking up, and high business and consumer confidence point to a strong expansion going forward.

But challenges remain, as the 2018 OECD Economic Survey of Finland shows. GDP per capita exceeds the OECD average, but is significantly lower than in Denmark, Germany and Sweden, reflecting differences both in productivity and labour utilisation (Figure 1). A rapidly ageing population reduces labour supply and puts pressure on public finances. Hence, future growth and well-being will hinge on a higher employment rate and productivity gains, both in the private and public sectors. Reassuringly, these challenges are well understood by the government, which has been implementing structural reforms across a wider range and with more determination and coherence than in most other OECD countries.Finland2.JPG

Many of these reforms concern the labour market. The 2016 Competitiveness Pact between the government and the social partners lowers unit labour costs by about 4% from 2017 by internal devaluation. The social partners have also moved from a system of national-level collective agreements towards a system of “organised decentralisation”, where sector-level collective agreements are coordinated following the lead of export industries, and more leeway is given to local-level bargaining. Furthermore, the duration of unemployment benefits was reduced by 100 days in 2017, a job search requirement and a new activation model for the unemployed were introduced, the trial period for new hires was extended and education made more modular and nimble to better respond to evolving skill needs.

The health, social services and regional government reform will shift the responsibility for organising health care and social services from municipalities to 18 newly created autonomous counties from January 2020, bringing the sub-national government structure closer to that of the other Nordic countries. Goals of the reform include providing people with more equal services, increasing freedom of choice and improving the sustainability of general government finances. The reform is welcome, and its success is crucial to meet the needs of an ageing population and ensure long-term fiscal sustainability (Figure 2).

Finland no time for complacency2

The strong pick-up in economic growth and an impressive reform record are reasons for optimism, not complacency. Social welfare reform could boost employment further, as many unemployed today will see only small net income increases or even incur a loss upon return to work. Coordinating the tapering of various working-age benefits against earnings could drastically improve work incentives and transparency, while preserving the current level of social protection, and is hence a more promising route for future reform than a basic income. Furthermore, specific measures could lift work incentives for parents and older workers. Combined with the new income registry linking benefit payments to real-time incomes from 2019, such reforms would make for a truly efficient and inclusive benefit system, adapted to evolving work patterns. Work incentives could be further strengthened by reducing the tax burden on labour while further increasing indirect and property taxes and reducing tax expenditures. Such a tax shift, along with measures to support business development and entrepreneurship could also give productivity a welcome boost.

References

OECD (2018), OECD Economic Surveys: Finland 2018, OECD Publishing, Paris.
http://dx.doi.org/10.1787/eco_surveys-fin-2018-en




Brighter futures or dashed expectations? The global recovery needs to deliver gains for all

By Lukas Lehner and Dorothée Rouzet, OECD Economics Department

Global growth has gained momentum in 2017 and the economic recovery is moving forward, as shown in our latest Economic Outlook. Labour productivity is improving from its decade-long sluggishness. Yet, expected productivity gains still lag far behind pre-crisis norms, and will not be sufficient to set the stage for long-term improvements in living standards (Figure 1, Panel A). Multiple structural obstacles –  including a lack of competition and business dynamism and high shares of “zombie” capital – slow down the investment, innovation, and technology diffusion that are crucial for productivity growth.

EO-2-12-2017

Slow labour productivity growth has been a driver of slow increases in real wages, alongside remaining hidden labour market slack, a rise in non-standard forms of employment and weakened labour market institutions (Figure 1, Panel B). This means that in most advanced economies, incomes are unlikely to rise in line with the pace that households experienced in pre-crisis decades, and that they have come to expect for the future.

Without stronger and more widely shared productivity, wage and income growth, promises to younger generations will not be kept. In the past, each generation used to enjoy rising incomes over their working lives and higher living standards than their elders. These trends have slowed or even reversed in the last decade for generations currently in their prime working age (Figure 2). Real incomes have decreased for people born in the 1970s, feeding into public dissatisfaction. Ensuring that this lost decade does not become a “lost generation” is a call for deeper policy changes.

EO-2-2-12-2017

To raise prospects for better living standards for their populations, policymakers need to take action to catalyse more robust investment and productivity gains towards higher wages and incomes for all. Reform packages should focus on promoting competition and trade, improving active labour market policies and social protection, and developing human capital to seize the opportunities of the future. The short-term momentum provides a window for bold action that could and should promote stronger and more inclusive growth.

References

OECD (2017), OECD Economic Outlook, Volume 2017 Issue 2, OECD Publishing, Paris.

OECD (2017), Preventing Ageing Unequally, OECD Publishing, Paris.
http://dx.doi.org/10.1787/9789264279087-en




The Walking Dead: Zombie Firms Stifle Economic Recovery Prospects

By: Müge Adalet McGowan, Dan Andrews and Valentine Millot – Structural Policy Analysis Division, Economics Department, OECD.

With the global economy stuck in a low growth trap, it is crucial to understand the factors behind the weak recovery in potential output growth, and particularly the barriers to productivity growth. New research shows that this dynamic can be partly understood in terms of the increasing survival of zombie firms – i.e. those firms that would typically exit in a competitive market but are being kept alive by creditors or policy weakness. Today, a key risk is that zombie firms may depress creative destruction, crowd-out growth opportunities for healthy firms and underpin a period of macroeconomic stagnation, just as they did in Japan in the 1990s (Caballero et al., 2008).

In a number of countries, the prevalence and productive resources sunk in “zombie” firms – defined as old firms that have persistent problems meeting their interest payments – has risen since the mid-2000s (Figure). In Italy, for example, the share of the industry capital stock sunk in zombie firms rose from 7% to 19% between 2007 and 2013. This is problematic because zombie firms can congest markets and reduce industry profitability – by inflating wages relative to productivity and depressing market prices – which deters the expansion of healthier firms, especially recent entrants.

zoombie-walking-dead

Econometric analysis shows that when more industry capital is sunk in zombie firms, the typical non-zombie firm undertakes less investment than otherwise. But the story does not end there because zombie congestion disproportionately crowds-out the growth of more productive firms, thus slowing productivity-enhancing capital reallocation and aggregate multi-factor productivity (MFP) growth.

The rise of zombie congestion can be connected to the collapse in OECD potential output via two key channels: weaker business investment and MFP growth. For example, simulations show that had the zombie capital share not risen from its pre-crisis levels:

  • Investment of a typical non-zombie firm in Italy could have been around 6% higher in 2013. This can account for one-quarter of the actual decline in aggregate private non-residential business investment in Italy between 2008 and 2013.
  • Aggregate MFP could have been 0.7% to 1% higher in Italy and Spain respectively, owing to more efficient capital reallocation. This is significant given that in both countries, MFP subtracted significantly from potential growth over the past decade.

In some countries, these problems are likely to be symptomatic of weak insolvency regimes and a slowdown in the pace of product market reforms. But zombie firms may also be kept alive by bank forbearance and the persistence of crisis-induced SME support policy initiatives. While reforms in these areas may help revive productivity growth, it is crucial that they are flanked by well-designed active labour market policies, which have been shown to be effective at returning workers displaced by firm exit to work (see recent Ecoscope blog).

References

Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries”, OECD Economics Department Working Paper No. 1372.

Caballero, R., T. Hoshi and A.K. Kashyap (2008), “Zombie Lending and Depressed Restructuring in Japan”, American Economic Review, 98(5), pp. 1943-1977.




The refugee crisis: a challenge but also an opportunity for improving policies to integrate immigrants into the Dutch labour market

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

netherlands

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.

  1. 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.

  1. 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.