Transcript Iceland: From Boom to Bust and Then What?

Incomes, Hours of Work, and Equality
in Europe and the United States
Presentation at 28th Villa Mondragone
International Economic Seminar,
Rome, 23-24 June 2015.
Thorvaldur Gylfason
Two parts
• Comparison of G8 economic performance
shows the EU surpassing the US
– GDP or GNI per capita can be misleading
– GNI per hour worked, esp. if adjusted for income
distribution, is more informative, as is also
– Human Development, incl. education and health
• Discussion of overall success of the EU
– Peace, with open arms
– Prosperity based on efficiency, fairness, and
human rights
Standard measures of income
need to be extended
• GDP and GNI per capita leave many things out
– Underground economy (Italy showed the way)
• Home production
– Movements of national assets and liabilities
• E.g., environmental degradation, external debt, …
– Social indicators (Deaton, Stiglitz, …)
• Human Development Index reflects education and health as
well as incomes
– Income distribution
• Assess economies in two dimensions like stocks with risk and
returns
– Hours of work
Importance of hours of work
• Income per hour worked is a better measure
of the standard of life than income per person
because income per hour worked reflects the
effort behind the income earned
• Most people would prefer unchanged income
combined with less work if given a choice
– Source of data on GDP per hour worked:
Economists at University of Groningen in the
Netherlands, originally led by Prof. Angus
Maddison
Hours and work
Hours per worker
2,500
Labor force participation
80
70
2,000
60
50
1,500
40
1,000
30
20
500
10
0
0
Canada France Germany
Italy
1990
Japan
2016
Russia
United United
Kingdom States
Canada
France Germany
Italy
Japan
1989
2014
Russia
United United
Kingdom States
Sources: World Bank, World Economic Indicators, and The Conference Board Total Economy Database™, May 2016.
G8 countries: Hours of work matter
GNI per capita 1990 and 2014
(Current USD, PPP)
60000
GNI per hour worked 1990 and
2014 (2015 USD, ppp)
80
70
50000
60
40000
50
30000
40
30
20000
20
10000
10
0
0
Canada France Germany
Italy
1990
Japan
2014
Russia
United United
Kingdom States
Canada
France Germany
Italy
Japan
1990
2014
Russia
United United
Kingdom States
Sources: World Bank, World Economic Indicators, and The Conference Board Total Economy Database™, May 2016.
Measuring GNI per hour worked
𝑌
𝑦= =
𝐻
𝐻
𝐸
𝑌
𝑄
𝐸
𝐿
𝐿
𝑄
Y is GNI
H is hours
Q is population
E is employment
L is labor force
E/L = 1 – u/100 where u is unemployment rate in %
L/Q is labor force participation rate
Adjusting for income distribution
𝑦 𝑎𝑑𝑗 = 𝑦 1 − 𝐺𝑖𝑛𝑖
Crude method, used in Human Development
Report, of reducing a two-dimensional
phenomenon to one dimension
Gini is roughly the ratio between the geometric
and arithmetic means of the relevant
distributions
Adjusting for income distribution
HDI and adjusted HDI 2014
1
Unadjusted and adjusted GNI per
hour worked 2014 (2015 USD, ppp)
80
0.9
70
0.8
60
0.7
50
0.6
0.5
40
0.4
30
0.3
20
0.2
10
0.1
0
0
Canada
France Germany
HDI
Italy
Japan
Adjusted HDI
Russia
United United
Kingdom States
Canada
France Germany
GNI per hour
Italy
Japan
Russia
United United
Kingdom States
Adjusted GNI per hour
Source: United Nations Development Program and author’s computations.
Double adjustment for income
distribution and hours
• Adjustment of the HDI for income distribution
lowers the US rank by 20 – i.e., from #8 to #28
• Adjustment for hours of work weakens the US
position vis-à-vis the EU where hours are
generally shorter
• Adjustment for both at once seems likely to
relegate US to 7th place in G8, ahead of Russia
– Remains to be done
EU’s success on several fronts
• Helped keep the peace in Europe since 1945
• Promoted prosperity by stressing efficiency,
fairness, and human rights
• With open arms, welcomed formerly
autocratic countries back into European fold
• Helps to explain continued attractiveness of
EU membership to all but the most inwardlooking countries in Europe
EU vs. US
• American workers spend 1,800 hours per year at
work compared with 1,400 hours in Germany and
1,500 hours in France
• In 1960, average American was 3 cm taller than
average German whereas, today, average German
is 3 cm taller than average American (Komlos)
• Middle-aged non-Hispanic white Americans have
faced declining life expectancies since 1999 due
to a sharp rise in life-style related diseases and
suicides (Case and Deaton, 2015)
Conclusion
• With more members, the average size of EU
countries continues to decrease
• Small countries have higher per capita incomes
than large ones because various benefits of small
size, including cohesion and homogeneity, seem
to outweigh the costs due to diseconomies of
small scope and scale and small pools of talent
• Independence aspirations of Catalonia, Scotland,
and others need not be viewed with alarm