Presentation of chapter 2: Promoting productivity and equality, a twin challenge, of the June 2016 OECD Economic Outlook

1. Paris, 1 June 2016
OECD ECONOMIC OUTLOOK
SPECIAL CHAPTER
Promoting Productivity and Equality:
A Twin Challenge
www.oecd.org/economy/economicoutlook.htm
ECOSCOPE blog: oecdecoscope.wordpress.com

2. Key messages
2
The productivity slowdown and the rise in inequality
• Productivity has slowed markedly since the mid-2000s
• Income inequality is at its highest level in 30 years
• Slowing productivity + Rising inequality = Weak median income growth
The policy package I: Macroeconomic policy
• Monetary policy cannot work alone
• Fiscal policy can strengthen investment, productivity and employment
• Higher public investment would expand demand and supply
The policy package II: Structural and financial reforms
• The pace of pro-competitive reforms has slowed
• Priority should be to enhance people’s skills and business dynamism
• Financial reform should focus on reducing private-sector leverage

3. Productivity has slowed markedly
3
GDP per hour worked, annualised growth
Productivity growth in OECD countries has more than halved since the 1990s

4. Weak demand contributes to the slowdown
4
Growth of GDP per worker, OECD average
Labour productivity has on average grown below trend since 2007

5. Investment has been sluggish and
total factor productivity has slowed
5
Decomposition of trend productivity (GDP per worker) growth, OECD average
Trend productivity has slowed: • Before the crisis mainly due to slowing TFP
• Since the crisis due to sluggish investment

6. Slowing innovation and diffusion may
contribute to weak productivity
6
Labour productivity, average of 24 countries
The gap between the globally most productive firms and the rest has widened

7. Wages have grown less than productivity
7
Hourly values, annualised growth, 1990-2013
Many workers have been hit by a “double whammy”:
(1) The productivity slowdown, and (2) even weaker growth in wages

8. Income inequality has increased
8
Household disposable income, OECD average
Average income growth per year – Top 10%: 1.2% ↔ Bottom 10%: 0.2%

9. Wage inequality and productivity
dispersion are strongly correlated
9
Correlation vs. causation: Does productivity dispersion boost wage inequality?

10. 10
The productivity slowdown
+
The rise in inequality
What can policy do about it?

11. Macroeconomic policy
11
Productivity and inequality since the global financial crisis
• Weak demand explains half of the productivity slowdown since 2007
• The post-crisis decline in employment has increased inequality
• Macroeconomic policy can strengthen productivity and employment
Monetary policy
• Reliance on unconventional tools has been strong (euro area, Japan, etc.)
• Concerns are growing over distortions and effectiveness
• Macro policy mix needs to shift to an enhanced use of fiscal policies
Fiscal policy
• Fiscal stance is broadly neutral in advanced economies
• But: Government borrowing costs are very low, even over long horizons
• Collective fiscal expansion would increase productivity, income and jobs

12. Public spending policies
12
Improving government effectiveness
• The quality of public services (education, health, transport) matters
• Growth, productivity and equality gain from effective government
Priority I: Education
• Investing in education improves human capital and productivity
• Early childhood, primary education enhances equality of opportunity
Priority II: Public investment
• Infrastructure in many countries is perceived to be deficient
• Reprioritising spending to public investment would improve
productivity and leave inequality broadly unchanged

13. Shifting spending to public investment
can deliver large income gains
13
Long-term income gains from raising public investment in low-investment countries
to the level in high-investment countries
More public investment increases household income across the distribution

14. Competition and innovation policies
14
Reforms of product markets
• Countries have ample scope to facilitate entry and exit of firms
• Enhanced product market competition would boost productivity and jobs
• Effects on income inequality tend to be small
Innovation policies
• Innovation and R&D are important to raise total factor productivity
• Examples are fiscal incentives for R&D and patent rights protections
• Effects on income inequality tend to be small
Coherence between policies
• Policies need to work together to enhance overall well-being and equality
• Product market reforms increase transitions in and out of work
• Complementing them with activation policies helps low-income workers

15. Less regulation of network industries
increases productivity and income
15
Household income gains after a 1% reduction in the OECD regulation index
Income rises across the distribution, leaving inequality broadly unchanged

16. Financial market policies
16
Finance and productivity growth
• Finance is important to fund investment and innovation
• But: Too high leverage was a key factor in the crisis
• Credit supply constraints may exacerbate the investment slowdown
Finance and income inequality
• Financial expansion tends to increase income inequality
• Bank credit goes more to high- than low-income households
• Earnings in the financial sector are very high
Reforming finance
• Further write-downs of non-performing loans would reduce leverage
• Faster bank recapitalisations would facilitate the provision of new credit
• Reducing too-big-to-fail guarantees would lower bank leverage

17. The financial sector wage premium
increases along the earnings distribution
17
Average of 18 European countries, controlling for many potentially confounding factors
High wage premiums increase inequality and are likely to reduce productivity

18. Summary
18
Productivity growth has slowed markedly and income inequality has risen
to new highs
The combined effect of these two trends yields low rates of income
growth for many workers
Comprehensive monetary, fiscal and structural policies can tackle the
productivity slowdown and the rise in inequality together
Collective fiscal expansion, in particular through stronger investment,
would increase productivity, income and jobs
Structural and financial reforms are important to improve people’s skills,
revive business dynamism and reduce financial leverage

19. 19
Disclaimers
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.