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2014.11.20 - NAEC Seminar - Microstability


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2014.11.20 - NAEC Seminar - Microstability

  1. 1. NAEC Seminar, 20 November 2014 EFFECTS OF GROWTH-ENHANCING POLICIES ON MICROECONOMIC STABILITY Boris Cournède, Paula Garda, Peter Hoeller, Volker Ziemann Public Economics Division of the OECD Economics Department
  2. 2. The impact of reforms on instability: an integral part of NAEC • OECD Going For Growth publications have recognised side-effects of growth-promoting policies on income inequality, the environment, government budgets and external accounts. • The recent financial crisis has underlined the damage that economic instability can inflict on welfare. • Looking at macroeconomic stability is not enough. • This study moves one step closer to people and analyses microeconomic stability focusing on firms, households and individuals. • Instability also affects growth and social mobility.
  3. 3. Microeconomic volatility and inequality are tightly linked • Both influence welfare through similar channels • Microeconomic volatility tends to be higher in more unequal countries Cross-sectional standard deviation of household disposable income growth and Gini coefficient, 2005-10 60 55 50 45 40 35 30 25 Source: OECD (2014, forthcoming). AUS AUT BEL KOR CAN CZE DEU DNK ESP EST FIN FRA GBR GRC HUN ITA LUX NOR NLD POL PRT SVK SVN SWE USA 20 0.22 0.27 0.32 0.37 0.42 Microeconomic volatility, % Income inequality
  4. 4. Volatility can be measured in different ways at the micro level • Rolling window: fluctuations are measured for each individual around average growth. Very natural but few degrees of freedom (estimation risk). • Incidence of large changes: the measure counts the proportion of people who undergo large changes (here, greater than 20%). It allows separate analyses of large increases and decreases. • Cross-sectional measure: it evaluates the dispersion of individual changes around the average. It is less demanding on the data but implicitly assumes constant average growth across the population (model risk). • The three measures are very highly correlated: correlation coefficients are very high and 99% statistically significant.
  5. 5. Greater microeconomic volatility is associated with poorer life satisfaction Cross-sectional standard deviation of household disposable income growth and self-reported life satisfaction, 2005-10 KOR Source: OECD Better Life Index and OECD (2014, forthcoming). 8 AUS AUT USA BEL CAN CHE CZE DEU DNK ESP EST FIN FRA GBR GRC HUN ITA LUX NLD NOR POL PRT SVK SVN SWE 60 55 50 45 40 35 30 25 20 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Microeconomic volatility Life satisfaction
  6. 6. Volatility is very different at the micro and macro level • Household-level disposable income volatility is much higher than at the aggregate level. • There is no cross-country correlation between macroeconomic and microeconomic volatility: 80 70 60 50 40 30 20 10 0 Line y=x 0 2 4 6 8 10 12 Microeconomic volatility, % Macroeconomic volatility, % Note: Each observation represents a country at a specific year for the period 1994-2010. Microeconomic volatility is measured by the cross-sectional standard deviation of disposable income growth across households in a given country. Macroeconomic volatility is calculated as the 3-year rolling standard deviation of real disposable income growth measured in the national accounts. Source: OECD (2014, forthcoming).
  7. 7. Mapping policy influences on micro-level volatility and economic welfare Changes in economic conditions - Financial and trade openness - Product market regulation - Financial market regulation - Network structure 1 Firm-output volatility - Bankruptcy legislation - Creditor rights - Labour market policies - Wage flexibility 3 Firm turnover Employment volatility - Barriers to entrepreneurship - Wage bargaining (risk premia, bonuses) - Tax and benefit system - Labour market policies - Financial markets (insurance, credit) 6 7 Earnings volatility Earnings growth 10 11 12 Consumption growth Consumption volatility - Level of risk aversion + − Welfare 13 2 4 8 5 9
  8. 8. Regulatory settings differ between countries with high and low firm turnover Government ownership 0.5 0.3 0.1 -0.1 -0.3 -0.5 -0.7 -0.9 (BR) Low turnover High turnover Barriers to competition (PMR) Barriers to trade and investment (PMR) Public ownership (PMR) EPL (regular workers) EPL (temporary contracts) Source: Bartelsman, Haltiwanger and Scarpetta (2013) and OECD (2014, forthcoming).
  9. 9. Many steps lead from individual labour earnings to household disposable income Individual labour income Source: OECD (2014, forthcoming). Household labour income Household market income Household disposable income Capital income Family formation and composition Taxes and cash transfers Hours worked and hourly labour income
  10. 10. Worker-level instability takes different forms • Changes in jobs (including into or out of employment), working-time or hourly earnings. • All three forms of economic instability are high and vary considerably across countries. Worker reallocation rates Volatility in hours worked and hourly labour earnings 2007 1995 Source: OECD (2014, forthcoming). 30 25 20 15 10 5 0 GRC LUX CZE ITA HUN SVK PRT BEL SVN DEU EST CHE AUT FRA POL NLD GBR IRL SWE FIN NOR ESP ISL AUS DNK AUS AUT FRA GBR BEL CAN CHE CZE DEU DNK ESP EST FIN GRC HUN IRL ITA KOR LUX NLD NOR POL PRT SVN SVK SWE USA 45 40 35 30 25 20 15 15 20 25 30 35 40 Cross sectional standard deviation in hourly earnings within a full time job Cross secrional standard deviation in annual hours
  11. 11. Three types of empirical analysis have been pursued Panel data econometric investigation of individual-level data covering 26 countries from 1994 to 2010 • Country-level aggregate measures of individual volatility • Individual-level measures of volatility are regressed on policy indicators and other relevant factors. Regressions include country and time fixed-effects. • Sector-level regressions provide indications about causality
  12. 12. Empirical results of policy effects on micro-level volatility Worker reallocation Volatility of annual hours worked Volatility of hourly earnings Employment protection (regular workers) * *** * Centralisation of wage bargaining *** *** Generosity of unemployment benefits * * Active labour market policies ** Product market regulation ** Credit intermediation *** *** *** Source: OECD (2014, forthcoming). The findings regarding EPL and PMR suggest that countries with tight policy settings may find themselves in “gradual-reform traps”: • Marginal growth-enhancing reforms can come at the cost of increasing instability; • Deeper reforms can boost growth without increasing instability.
  13. 13. Hourly earnings volatility decreased after Estonia relaxed EPL considerably 0.35 0.3 0.25 0.2 0.15 0.1 0.05 EPL Note: The curve shows the estimated relationship between the volatility of hourly earnings measured as cross-sectional standard deviation of labour income growth across individuals the and EPL, based on the estimates of panel data regressions at the country level for the period 1996-2010. See Cournède et al. (2014) for details on the empirical strategy and detailed estimates. Volatility of hourly earnings is measured using the cross-sectional standard deviation. Rectangles are data for Estonia pre-reform (average 2006-09) and post-reform (2010). The vertical line shows the OECD average for the EPL indicator for 2010. Source: OECD (2014, forthcoming). EST 2010 EST 2006-09 0 0.3 0.8 1.3 1.8 2.3 2.8 3.3 3.8 4.3 Volatility of hourly earnings OECD average
  14. 14. Large changes in individual labour earnings are strongly attenuated… Probability of avoiding a large (20%) change in household income when experiencing a 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 large change in labour earnings, 2005-10 SWE SVN NOR DNK NLD FIN BEL DEU CAN FRA CHE CZE LUX AUT HUN IRL PRT AUS SVK GBR GRC EST ITA ESP USA KOR POL Source: OECD (2014, forthcoming).
  15. 15. …largely owing to other household members and tax-and-transfer systems Decomposition of the change in household disposable income when the income of the household head drops by more than 20% Taxes K inc Transfers Indiv labour earnings Other HH members labour earnings Disposable income Source: OECD (2014, forthcoming). 80 60 40 20 0 -20 -40 -60 -80 -100 AUS AUT BEL CAN CHE CZE DEU DNK ESP EST FIN FRA GBR GRC HUN IRL ITA KOR LUX NLD NOR POL PRT SVK SVN SWE USA
  16. 16. Tax-and-benefit systems differ between high and low attenuation countries Cash transfer progressivity Unemployment benefit progressivity Tax progressivity Family cash transfers Source: OECD (2014, forthcoming). Total taxes/GDP 1.5 1 0.5 0 -0.5 -1 -1.5 Personal income tax Property tax Social contributions Consumption taxes Total social expenditure/GDP ALMP Unemployment benefits High Low Size and cash transfer mix 1 1 2 1 2 2 1
  17. 17. Many pro-growth reforms raise trade-offs with stability and inequality Effect of change on: A pro-growth change: Income equality Micro-level stability Easing EPL for regular workers + Increasing product market competition +1 Boosting ALMP spending + + Lowering unemployment insurance replacement rate +2 - Reducing the total tax-GDP ratio - - Reducing the size of social transfers - - Reducing PIT progressivity - - 1. Earlier results were mixed, but recent evidence points to overall reduction in inequality (OECD, 2015). 2. Overall inequality diminishes owing to employment effects. However, cutting benefits going to groups with low employment prospects can increase inequality. Source: Joumard et al. (2014), OECD (2014, forthcoming), OECD (2015).
  18. 18. The growth-volatility frontier provides an exploratory tool to analyse this trade-off 0.12 0.1 0.08 0.06 0.04 0.02 0 -0.02 -0.04 -0.06 0.15 0.2 0.25 0.3 0.35 0.4 0.45 Cross-sectional volatility of real disposable income growth Trend real disposable per capita income growth Note: Trend per capita disposable income growth is calculated with aggregate national accounts data. Household disposable income growth volatility is derived from household surveys and is corrected for year-fixed effects. Source: Cournède, Garda and Ziemann. (2014, forthcoming).
  19. 19. Policy settings appear linked to the distance to the growth-volatility frontier Link with distance to growth-volatility frontier Looser employment protection Higher pending on ALMPs * Lower unemployment benefit replacement rates ** Less centralisation in wage bargaining ** More competitive product market regulation Note: All policy indicators are standardised and centred. Estimation based on a sample of 173 observations across 21 countries. Time-fixed and country-fixed effects are included. The shapes indicate the estimated relationship between policy estimators (rows) and the distance to the frontier (columns). Stars reflect confidence levels for the linear and squared term: ** stands for for 95% and * for 90%.If significance differs between the linear and squared terms, the lower level is shown. For employment protection and the credit intermediation ratio only the squared term is significant. Source: Cournède, Garda and Ziemann. (2014, forthcoming).
  20. 20. The detailed results are available in: • OECD (2014), “Effects of Pro-Growth Policies on the Economic Stability of Firms, Workers and Households,” OECD Economic Policy Papers, forthcoming. • Garda, P. and V. Ziemann (2014), “Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics,” OECD Economics Department Working Papers, No. 1115. • Cournède, B., P. Garda and V. Ziemann (2014), “Effects of Economic Policies on Microeconomic Stability,” OECD Economics Department Working Papers, forthcoming. Additional references: • Joumard, I, P. Hoeller and I. Koske (2014), Income Inequality in OECD Countries: What are the Drivers and the Policy Options, World Scientific Publishing. • OECD (2015), Going for Growth: Economic Policy Reforms in OECD Countries.