Transcript GDP per capita effects of different structural reforms

The Impact of Structural
Reforms on material living
standards in OECD countries
Conference on Macroeconomic Effects
of Structural Reform,
Ankara, October 26, 2007
Sven Blondal,
Economics Department,
OECD
Outline of the presentation
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Basic accounting framework to
assess the impact: key building
blocks
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Preliminary simulation results
The empirical framework
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 GDP   GDP   HOURS   EMPL   POP 

ln
 ln
  ln
  ln
  ln
1565 
 POP   HOURS   EMPL   POP   POP 
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GDP per capita can be decomposed into:
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Productivity component
Average hours component
Employment rate component
Demographic component
Empirical studies show that structural reforms can increase
productivity, average hours worked and the employment rate
Productivity and structural reforms
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Structural reforms affect the level of labour
productivity:
• The long-run: Permanently increasing the level of labour
productivity.
• Dynamics: Speeding up the catch-up of labour
productivity to best practice.
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Structural reforms may permanently affect the
growth rate of labour productivity, but this is
uncertain and not taken into account in OECD
work.
Long-term productivity levels and
structural reforms
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Long-term productivity levels depend on
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Investment in physical capital
Investment in human capital
Investment in research and development
The strength of competition in domestic markets
Capital investment and structural
policy
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Capital investment depends partly on investment in information
and communication technology (ICT).
Investment in ICT is strongly affected by the stringency of
competition-restraining product market regulations (PMR) and
human capital.
Investment in non-ICT is likely to be affected by a host of policy
factors (including corporate and other taxes) but these influences
remain to be confirmed in OECD studies.
Human capital investment and
structural policy
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Educational policy influences the volume and
quality of human capital of young cohorts.
Educational reforms take a long time to have their
full effects on productivity levels.
Business R&D and structural policy
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R&D in the business sector can be stimulated by:
• Framework policies
• Strong competition in product markets, e.g. by
reducing competition-restraining PMR, and adequate
protection of intellectual property
• Educational policies that ensure that highly skilled
staff is available to engage in innovation activity
• Employment protection arrangements that do not
inhibit work re-organisation
• Innovation-specific policies
• Public research which can act as a lever for private R&D
• Financial support to private R&D through the tax system or
public subsidies
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Openness, competition and structural
policy
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Openness and competition is facilitated by:
– Low tariff and non-tariff barriers
– Low barriers to inward foreign direct investment
– Product market regulations geared towards strong
competition in product markets
– Competition policies aimed at preventing anticompetitive practices
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Productivity dynamics and structural
policies
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The speed at which countries catch up with high
productivity countries depends on the degree of
product market competition.
Reforms of product market regulations that
strengthen competition are therefore found to
speed up the convergence with best performing
countries.
Hours worked and structural reforms
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Structural policy affects hours worked:
• High marginal tax rates reduce average hours worked,
but this effect is confined to women.
• Low statutory ceilings on normal hours and overtime
hours reduce average hours worked, but this effect is
confined to men.
• Generous provisions regarding annual paid leave, and
sickness and maternity/paternity leave, show up in
lower annual hours worked.
• Stringent product market regulations and employment
protection legislation reduce average hours worked by
men.
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Employment rates and structural
policies
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Employment rates of prime-age males, prime-age females,
youth and people over the age of 55 are influenced to a
varying degree by:
• Unemployment benefit levels and duration.
• Average tax wedge
• Disability benefit arrangements
The employment rate of prime-age women is also affected
by:
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Family cash benefits
The length of maternity benefits
Childcare support
Educational attainment of women
Product market regulations
Employment rates and structural policies (cont.)
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The employment rate of people over the age of 55
is also influenced by:
• The implicit tax on continued work embedded in
pension and early retirement systems.
• The standard age of eligibility to old-age pensions.
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Simulation of structural reforms
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The framework makes it possible to
• Derive the total GDP per capita effects of different
structural reforms.
• Rank different policy reforms in terms of their
effectiveness of raising GDP per capita.
• Assess the combined effects of raising all policy
stances to the OECD average.
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GDP per capita effects of different structural
reforms: “10 per cent reforms”
"10 per cent shock" in the average country
GDP per capita impact (%)
Unemployment benefit replacement rates
6 ppt. reduction
0.8
Average tax wedges
3 ppt. reduction
0.7
Standard retirement age
6 years increase
0.5
Implicit tax on continued work
3 ppt. reduction
0.1
0.7 ppt. reduction
0.1
0.2 points on the OECD index
1.9 (10 years); 1.2 (perm.)
1.3 years increase
0.5 (10 years); 4.4 (50 years)
Disability support rates
Product market regulations
Average length of education, 16-24
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GDP-per-capita impact of policy
reforms: Preliminary results for Turkey
(per cent)
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10
8
10 yr
6
SS
4
2
0
Human Capital
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PMR
EPL
Maternity Leave
R&D
GDP-per-capita impact of policy
reforms: Preliminary results for France
(per cent)
6
5
4
3
10 yr
SS
2
1
0
PMR
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ARR
Average Tax Implicit Tax on
Continued
Work
Sickness
Leave
Standard
Retirement
Age
EPL
R&D