The document presents a framework for inclusive growth that links policies to outcomes related to living standards. It discusses channels of transmission from income generation to distribution and living standards. The framework aims to identify policy trade-offs and synergies across dimensions like growth, health, and inequality. Empirical analysis examines how productivity-enhancing and labor market policies impact inequality and employment. The framework and analysis have implications for Latin American and Caribbean countries, highlighting opportunities to promote inclusive growth through improving education quality and equity, reducing barriers to competition, increasing female labor participation, and calibrating minimum wage and labor policies.

1. Inclusive Growth:
A framework for linking living
standards to policies
Alain de Serres
OECD Economics Department
21 May 2014
II Europe – Latin America Forum
Paris

2. 2
IG: Framework
Focus of the presentation
1. Framework for linking outcomes to policies
2. From income generation to income
distribution: some evidence on trade-offs
and synergies
3. Implications for LAC countries

3. 3
Inclusive Growth
Objectives pursued in linking outcomes to
policies
1. Identify the main channels of transmission
2. Make explicit the main policy trade-offs and
synergies
3. Approach sufficiently flexible to be adaptable
to country-specific challenges and
circumstances

4. 4
IG : Framework
Linking policies to outcomes
Living standards
Household Income Life Expectancy
Mean Median Bottom
From production to income to living standards taking into account
health outcomes and inequality
Income distribution
Production (income generation)
GDP per capita

5. 5
IG : Income generation
Income generation:
The policy determinants of GDP per capita
GDP per capita
Labour Productivity Employment
Geography
Knowledge-based
capital
Physical capital Life expectancy
Innovation policies
Product and financial
market policies
Framework conditions and institutions
Human capital
Education policies
Labour market policies
This simple breakdown into labour productivity and employment would
be necessary to have the latter dimension explicitly linked to policies

6. 6
IG : Health and life expectancy
Health status: the policy determinants of life
expectancy
Health care
provisions
Pollution
Life Expectancy
Education Life style
Environmental
policies
Production
activites (pro-growth
policies)
Educational
policies
Health policies:
Spending
Efficiency
Household
income
Missing determinants such as poverty, exclusion, discrimination and
job insecurity. Less of a problem if they correlate with income inequality

7. 7
IG: Framework
Potential policy trade-offs across dimensions
1. Growth policies and health
 May raise incomes for a majority but also entail higher air or
water pollution : unclear net effect health and living
standards
2. Environmental policies, income and health
 May lower GDP per capita and household disposable income
but still improve living standards through better health
3. Health policies and income
 Higher spending on health can raise life expectancy but
could also crowd-out other types of public or private
investment (or consumption)
 Higher life expectancy may lead to higher employment
and GDP but only if working life is adjusted in proportion

8. 8
IG: Empirical analysis
2. From production to income distribution:
Growth policies, employment and wage
dispersion

9. 9
IG : Income distribution
Important to understand how GDP per capita trickles
HH incomes at different point of the distribution
Real annual growth rates in GDP, mean and median income
Mean and median incomes have in many countries lagged GDP growth
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
during the pre-crisis period
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-0.5
B. Mid 90s-20071
Median income Mean income GDP per capita

10. 10
IG : Empirical analysis
From GDP per capita to HH real disposable income
Elasticity of bottom to top income standards to GDP per capita
1
0.9
0.8
0.7
0.6
0.5
Average income
Disposable income without time treatment
-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
The responsiveness of HH income to GDP per capita has been weaker
at the lower end of the distribution, on average across countries and over
the past three decades

11. 11
IG : Summary results
The impact of productivity-enhancing policies on
earnings inequality and employment
Wage dispersion
G = Good; B = Bad; N = Neutral
Employment
Overall
earnings
dispersion
A pro-growth change in:
D9/D1 D9/D5 D5/D1
Technology
Technical progress (MFP) B + N B
Trend R&D intensity B + N B
Globalisation
Trade integration N - N N
FDI openness (index) N - N N
Education / Human capital
High-to-low skill ratio G - - G G
Product market competition
Regulatory barriers to entry B + N / G N / G

12. 12
IG : Summary results
The impact of labour market policies on earnings
inequality and employment
Wage dispersion
G = Good; B = Bad; N = Neutral
Employment
Overall
earnings
dispersion
A change in:
D9/D1 D9/D5 D5/D1
Labour Market Policies
Easing EPL (overall protection) B + N / G B / N
Easing EPL (reducing duality) G G G
(Lower) minimum wage B + N / G N
Lower UI benefit RR B G N
Higher ALMPs N G G
Lower tax wedges B + G N / G
Labour force composition
Participation of women G - G G

13. 13
IG: Empirical analysis
3. What this suggests for LAC countries

14. 14
IG : Performance
Convergence in productivity levels has been uneven over
the last decade
Average productivity growth over 2002-12 against level in 2002
POL SVK
Performance of LAC countries has been disappointing considering the
11
10
9
8
7
6
5
4
3
2
1
scope for catching-up
AUS
CAN
DNK FRA
DEU
HUN
ITA
JPN
KOR
MEX
ESP
TUR
GBR
USA
RUS
BRA
CHN
IND
IDN
ZAF
COL
EU
CHL
0
0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 42.5 45 47.5 50
Level, US dollars, 2002
Average of growth rates, 2002-12
OECD average
OECD average

15. 15
IG: Performance
Substantial gaps prevail in average levels of education
but EMEs have been catching up over the past 20 years
Average number of years of schooling of the adult population
2010 1990 1970
EMEs also lags in terms of educational outcomes based on PISA scores
16
14
12
10
8
6
4
2
0
IND IDN CHN TUR BRA SAU MEX ZAF KOR ESP ITA RUS ARG FRA CAN JPN GBR AUS DEU USA

16. 16
Going for Growth : Performance
Great scope for IG from quality and equity in education
Peru
Germany
Israel
Costa Rica
Chile
Bulgaria
Portugal
France
Uruguay
Chinese Taipei
Romania
Singapore
Viet Nam
Korea
Japan
Canada
Australia
Norway
Italy
Greece Russian Federation
Indonesia
Turkey
Colombia
Tunisia
Argentina
Brazil
Malaysia
Spain
United Kingdom
Belgium
Switzerland
Shanghai-China
United States
Hong Kong-China
Finland
Sweden
Macao-China
Kazakhstan
Qatar
Mexico
650
600
550
500
450
400
350
300
OECD
average
30 25 20 15 10 5 0
Percentage of variation in performance
explained by the PISA index of economic, social
and cultural status
OECD average
Above-average mathematics performance
Below-average equity in education outcomes
Above-averagemathematics performance
Above-average equity in education outcomes
Below-average mathematics performance
Below-average equity in education outcomes
Below-averagemathematics performance
Above-average equity in education outcomes
Greater
equity

17. 17
IG : Policies
Regulatory barriers to competition are relatively high
OECD average LAC average
OECD Indicator of Product Market Regulation, 2008
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Product market
regulation
State control Barriers to
entrepreneurship
Barriers to trade and
investment
Gap vis-à-vis OECD average is particularly large in barriers to foreign
competition

18. 18
IG : Policies
But with substantial variation across LAC countries
OECD Indicator of Product Market Regulation, 2008
OECD average
LAC average
Preliminary results based on collaboration with the World Bank
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
CHL COL PER SLV NIC MEX DOM JAM BRA CRI HND ARG

19. 19
IG : Policies
Low female participation limits labour force participation
in some countries
Per cent
Particularly low relative to total participation in Mexico, Turkey but
90
80
70
60
50
40
30
20
10
also low in Chile.
Labour force participation rates, 2011
0
Women Total

20. 20
IG : Policies
Reforming labour regulation and extending social
protection can help reduce informality
Protection of workers against individual dismissals,
2013
Scale 0-6
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Difficulty of dismissal Notice and severance pay for no-fault individual dismissal Procedural inconvenience
OECD average: 2.04

21. 21
IG : Policies
A minimum wage can be a powerful tool to reduce
earnings inequality but less so for formal sector job creation
Ratio of minimum to median wages, 2011
80
70
60
50
40
30
20
10
0
RUS
IND
CHN
CZE
USA
JPN
EST
KOR
LUX
ESP
POL
CAN
SVK
GBR
NLD
IRL
HUN
BEL
GRC
AUS
ISR
PRT
SVN
NZL
Minimum cost of labour is already high in Brazil and Chile
FRA
IDN
CHL
BRA
TUR

22. 22
IG: Framework
Conclusion / Way forward
 Substantial progress achieved in LAC countries in
social convergence and poverty reduction
 Challenge ahead: Generating sustained growth while
creating a large middle class.
 Tackling informality
 Encouraging labour force participation of women
 Building sufficient institutional capacity to design
and administer more sophisticated programmes
 Challenge of IG framework: Ensure that it is
sufficiently flexible to reflect these objectives
 Adding (short-term) educational outcomes to the
welfare function to give it higher priority
 The jobs dimension should reflect the informality
priority

23. 23
IG: Framework
Thank you

24. 24
IG : Empirical analysis
From GDP per capita to HH real disposable income
Elasticity of bottom to top income standards to GDP per capita
1
0.9
0.8
0.7
0.6
0.5
Average income
Disposable income with time dummies
Disposable income without time treatment
-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
The treatment of time shifts the average elasticity closer to one, in
particular around the median. But top income severely underestimated
in survey data.

25. 25
IG : Empirical analysis
Growing inequalities can be harmful to GDP per capita
GDP elasticity to inequality across the distribution
0
-0.25
-0.5
-0.75
-1
-1.25
-1.5
-1.75
-2
-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
Growing inequality has an invariably negative impact on GDP per
capita in the long term.
Bottom to top-sensitive Atkinson measures