Can-pro-growth-policies-lift-all-boats-structural-reforms-and-income-distribution

1. Can pro-growth policies lift all boats?
Structural reforms and income
distribution
Paris, April 7 2015
www.oecd.org/eco/labour/structural-reforms-and-income-distribution.htm

2. GDP growth has been associated on
average with rising inequality
• One would expect GDP per capita and
average household incomes to move in
parallel over time…
• …but this has not really been the case across
OECD countries since the mid-1980s…
• …And the gap has been bigger at the lower
end of the distribution (see chart next).

3. Growth has been unequal on average
across OECD countries….
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12
Bottom to top-sensitive income standards
Household disposable incomes elasticities to GDP
Average income
Note: Elasticities obtained from the joint estimation of GDP and household incomes equations, without time trend (but with country fixed
effects). It is assumed that GDP per capita drives long-run levels of household incomes across the distribution. See Causa, de Serres and
Ruiz (2014) for details.

4. …but developments have not been
uniform
AUS
AUT
BEL
CAN
CZE
DNK
FIN
FRA
DEU
GRC
HUN
IRL
ITA
JPN
LUX
MEX
NLD
NZL
NOR
PRTESP
SWE
TUR
GBR
USA
CHL
ISR
-0.1
-0.075
-0.05
-0.025
0
0.025
0.05
0.075
0.2 0.225 0.25 0.275 0.3 0.325 0.35 0.375 0.4 0.425 0.45 0.475 0.5 0.525 0.55
Change
Initial level
Correlation coefficient= -0.76
OECD countries have experienced inequality convergence
Change in Gini coefficient against initial level: Mid-1990s to late 2000s
Source: Causa, De Serres and Ruiz (2015).

5. Why has growth has been unequal?
Some underlying factors
• A trend decline in the progressivity of tax
and transfer systems;
• A rising share of GDP being distributed in the
form of profits;
• And a growing share of profits being saved
by corporations and re-distributed in the
form of capital gains rather than interest or
dividends
• Some reforms may have had an impact on
household incomes that is different from that on
GDP

6. Reforms can have a differential impact on level of GDP per
capita and household incomes
Change in policy parameters to deliver a 1% long-term increase in GDP per
capita:
Example of specific structural policy reform
The
median
The lower-
middle class
The poor
Relax hiring and firing procedures / Reduce labour market duality 1.0 1.4 1.9
Reduce the level or duration of unemployment benefits 1.0 1.3 1.5 1.5 1.5
Reduce the level of unemployment benefits for the long-term unemployed 1.0 0.8 0.8 -1.5 -2.4
Reform the tax structure by reducing the share of direct (corporate and income) taxes
and increasing the share of property or indirect taxes 1.0 0.5 0.5 0.5 0.5
Reduce marginal tax rates on labour 1.0 1.3 1.3 1.3 1.3
Encourage educational upskilling and equity in access to education 1.0 0.9 0.9 0.9 0.9
Reduce barriers to entry for foreign firms -- FDI inflows 1.0 1.0 1.0 1.3 1.3
Reduce barriers to exports / Encourage exports among domestic firms 1.0 1.1 1.1 1.1 1.2
Encourage innovation and raise the effectivenness of R&D support 1.0 0.7 0.7 0.7 0.7
Effects on
long-term
GDP per
capita (%)
Effects on long-
term average
household
income (%)
Effects on long-term household incomes
across the distribution (%)
For example, reducing barriers to FDI so as to generate a 1% increase in GDP
will raise household income by 1% at the median level and by 1.3% at the lower
end of the distribution.

7. Reforms can have a differential impact on household
incomes across the distribution
Example of specific structural policy reform
The
median
The lower-
middle class
The poor
Step-up job-search support and activation programs for the unemployed 1.0 1.0 1.0 1.3
Increase the minimum cost of labour 1.0 1.0
Relax product market regulation (by easing entry restrictions in non-manufacturing
sectors, reducing barriers to firm entry)
1.0 1.4 1.8 2.9
Effects on
long-term
GDP per
capita
Effects on long-
term average
household
income
Effects on long-term household incomes across
Change in policy parameters to deliver a 1% long-term increase in GDP per capita:

8. Key policy messages: policy synergies and tradeoffs
• Many structural reforms have a stronger traction on household
incomes -- especially those at the low-end of the distribution-- than on
GDP per capita
• Long-term policy synergies between growth and equity objectives:
reforming job protection to tackle labour market duality;
reducing regulatory barriers to domestic competition as well
as to trade and FDI; and stepping-up job-search support and
activation programs
• Long-term policy trade-offs between the growth and equity objectives
are not easy to identify, but they include the following: tightening of
unemployment benefits for the long-term unemployed,
reduction of minimum relative to median wages

9. More Information…
Disclaimers:
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without
prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers
and boundaries and to the name of any territory, city or area.
9
OECD (2015), “Growth and Income Inequality: Trends and Policy
Implications”, OECD Economics Department Policy Note, No. 26, OECD
Publishing.
Causa, O. de Serres, A. and N. Ruiz (2015), “Structural Reforms and Income
Distribution,” OECD Economic Policy Papers, No. 13, OECD Publishing.
Causa, O. de Serres, A. and N. Ruiz (2014), “Can Pro-Growth Policies lift all
Boats? An Analysis based on Household Disposable Income”, OECD
Economics Department Working Paper No. 1180.