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by Laurence Boone, OECD Chief Economist, and Antoine Goujard, Head of the France Desk, OECD Economics Department

The recent yellow-vest demonstrations could well be simply a variant of the regional and social divides potentially linked to the same trend towards a rejection of globalisation that has emerged in a number of OECD countries. That is probably partly true, but the reasons for this movement are also rooted in a profound inequality of opportunity. It takes more than six generations in France for a person at the bottom end of income distribution to reach the mean. More than 15% of 15-year-olds have poor numeracy and comprehension skills, which are likely to lead to difficulties in finding work later. Of all the OECD countries, only Hungary shows more social determinism than France.

Inequalities of opportunity that are reproduced throughout the educational system and from one generation to another

Contradicting the oft-repeated assertion, France suffers not from insufficient income redistribution but from an inequality of opportunity that perpetuates economic and social situations from one generation to the next. In other words, the social elevator is broken and has been for some time. That inequality of opportunity hits not only the poorest: it also to some extent affects the middle classes.

Disparities between socio-professional categories and regions take root at a very early age. Although much early childhood education and care is provided through the social system and with state support, only 30% of children in the least well-off third of the population benefit from so‑called “formal” childcare services (nurseries, daycare or qualified childminders), compared with nearly 60% for the population as a whole. It is partly a question of access: such services are more or less well-developed depending on the municipality or neighbourhood. Yet they are important factors in a young child’s early learning, development and socialisation.

The disadvantages of a low-income socio-economic background persist at school. The OECD’s PISA studies assess the educational performance of 15-year-olds. The studies show that 15% of schoolchildren in France have low skills in reading comprehension and mathematics, one of the highest rates across OECD countries. They also show that the level of influence of social background on educational attainment is one of the highest among OECD countries. This is particularly true in mathematics, a subject which, as is well-known, has a considerable effect in France on access to the best educational opportunities. Here again local differences play a significant part, since it is more difficult to attract experienced teachers to some schools and some geographical areas concentrate pupils in difficulty.

Differences in educational level affect access to employment. The proportion of young people not in education, employment or training (NEET) in France is higher than the European Union average. Access to employment differs considerably according to level of qualification, and the premium for the most highly qualified is significantly higher than elsewhere. The employment rate of those leaving the educational system with an average general-education diploma (secondary or non-higher post-secondary) is 51%, one of the lowest in the European Union (only Italy and Greece score worse). In contrast, the employment rate for higher-education graduates is 83%, close to the EU average.

These differences in access to employment are persistent, not least because the lifelong learning system fails to remedy them among the low-skilled. The high proportion of low-skilled young people persists from one generation to the next and the proportion of low-skilled adults is also one of the highest in OECD countries: France ranks fifth among countries where adult skills are lowest as measured by PIAAC, the OECD’s adult skills survey. This is not corrected by access to training. First, the low-skilled are 50% less likely than others to have access to training. Second, the rate of participation in formal training in the array of available lifelong learning options is again one of the lowest among OECD countries. Recent reforms are seeking to change this situation, but much remains to be done. While recent one-off plans have helped to give the unemployed access to training, the same does not apply to the inactive.

Income gaps reflect disparities in access to employment and in taxation. In France, the income of the poorest 20% of the population, as well as the median disposable income, did not increase between 2008 and 2016. The targeted reduced rates of social security contributions may have significantly lowered the cost of labour for those on the minimum wage, but those contributions continue to weigh heavily on the median wage. Employers’ contributions as a proportion of gross wages are very low for the minimum wage (4% after the latest reductions), but rise to 36% for the median wage, a unique gap among OECD countries. Although this helps to provide welcome support for low-skilled jobs, it probably also holds back the increase in income between the minimum and the median wage, which may partly explain why there has been little gains in the purchasing power of the low-paid.

Redistribution corrects the most flagrant inequalities but does little to benefit the middle classes. The redistribution system in France is extensive and does much to correct poverty through substantial transfers to the least well-off households. Nonetheless, income inequalities before taxes and transfers are high in relation to the OECD average. Taxes and transfers, including unemployment benefits and pensions, merely reduce inequalities in income distribution to the OECD average. That suggests less redistribution of transfers net of tax to the middle classes.

Substantial housing costs add to these income disparities. Housing costs are a major item of basic household expenditure, and housing as a share of household consumption in France is higher than the European average. Again, a substantial social housing stock and significant housing benefits help to correct this for the least well-off households. Not all such households receive them, however, and middle-class households even less so.

In conclusion, redistribution through taxes and social transfers is a powerful way of reducing income inequality but substantial inequalities of opportunity remain, mostly linked to the educational system. Redistribution supports the standard of living of the poorest households but fails to correct disparities in the middle of the distribution range. Above all, it is not sufficient to curb inequality of opportunity linked to socio-economic background or territorial inequalities. The urgent need to give everyone a chance to succeed will require reform of the education system to ensure that through education and training every child has an opportunity to advance, from early childhood and throughout his or her life, and that every adult who has missed a step can catch up. The next OECD survey of France, to be published in April, will contain recommendations along those lines.

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par Laurence Boone, Chef économiste de l’OCDE et Antoine Goujard, Bureau France, Département économique de l’OCDE

Les récentes manifestations des gilets jaunes pourraient n’être qu’une variante des fractures territoriales et sociales potentiellement liées à un même phénomène de rejet de la mondialisation qui s’est retrouvé dans plusieurs pays de l’OCDE. C’est probablement en partie le cas, mais les raisons de ce mouvement trouvent aussi leur racine dans une profonde inégalité des chances. Il faut plus de 6 générations en France à une personne du bas de la distribution des revenus pour en rejoindre la moyenne. Plus de 15% des adolescents de 15 ans ont de faibles compétences numéraires et de compréhension, ce qui se traduira probablement par des difficultés d’insertion dans la vie professionnelle. Seule la Hongrie montre plus de déterminisme social dans tous les pays de l’OCDE que la France.

Des inégalités des chances qui se reproduisent à travers le système éducatif et les générations

Contrairement à ce qui est souvent affirmé, la France souffre non pas d’une trop faible redistribution, mais d’une inégalité des chances qui perpétue les situations économiques et sociales de génération en génération. Dit autrement, l’ascenseur social est en panne et depuis longtemps. Cette inégalité des chances ne frappe pas que les plus pauvres : elle affecte aussi en partie les classes moyennes.

Les disparités entre catégories socio-professionnelles et territoires s’ancrent dès le plus jeune âge. Alors que le système social et les aides publiques prennent en charge la garde des jeunes enfants de façon importante, chez le tiers de la population le moins aisé, seuls 30% des enfants intègrent des modes d’accueil dits « formels », crèches, halte-garderie ou assistantes maternelles, contre près de 60% pour l’ensemble de la population. C’est en partie une question d’accès : selon la commune ou le quartier où l’on habite, ces modes de gardes sont plus ou moins développés. Or ils permettent le développement dès le plus jeune âge des enfants, leur socialisation et leur éveil.

Les désavantages d’un milieu socio-économique moins favorisé se poursuivent à l’école. Les performances des élèves de 15 ans sont mesurées par l’OCDE dans les études PISA. Celles-ci révèlent qu’en France, la part des élèves ayant de faibles compétences de compréhension des textes et des mathématiques atteint les 15%, soit parmi les plus élevées des pays de l’OCDE. En outre, les mêmes études PISA montrent que l’influence du milieu social sur les performances scolaires est parmi les plus élevées des pays de l’OCDE, et tout particulièrement en mathématiques, matière qui, comme on le sait, conditionne beaucoup l’accès aux meilleures filières éducatives en France. Là encore, les disparités territoriales jouent un rôle important, avec des difficultés accrues pour attirer des enseignants expérimentés et des concentrations d’élèves en difficulté dans certaines écoles et zones géographiques.

Les divergences de niveau d’éducation conditionnent l’accès à l’emploi. Les jeunes sans formation et sans emploi représentent une part plus importante en France que la moyenne de l’Union européenne. Or l’insertion dans le marché du travail est très différente selon le niveau de qualification, avec une prime nettement plus élevée qu’ailleurs aux hauts diplômés. Les sortants du système éducatif avec un diplôme moyen de la filière générale (du secondaire ou post-secondaire non supérieur) ont un taux d’emploi, de 51%, parmi les plus faibles de l’Union eEuropéenne (seules l’Italie et la Grèce font pire). Alors que le taux d’emploi des diplômés du supérieur s’élève à 83%, et se situe dans la moyenne de l’Union Européenne.

Ces divergences d’accès au marché du travail se poursuivent tout au long de la vie, notamment parce que le système de formation professionnelle ne permet pas de remédier à ces inégalités chez les moins qualifiés. La part élevée de jeunes peu qualifiés persiste à travers les générations et la part des adultes faiblement qualifiés est également parmi les plus élevées des pays de l’OCDE : la France se classe au 5ème rang des pays où les compétences des adultes sont les plus faibles mesurées par PIAAC, l’enquête d’évaluation des compétences des adultes de l’OCDE. Ce qui n’est pas corrigé par l’accès à la formation professionnelle. D’abord, les peu diplômés ont 50% moins de chances d’avoir accès à une formation que les autres. Ensuite, le taux de participation aux formations formelles dans l’éventail de formation professionnelle disponible est, là encore, parmi les plus faibles des pays de l’OCDE. Les récentes réformes visent à changer cela mais de gros efforts restent à faire : si des plans ponctuels ont récemment soutenu l’accès des chômeurs à la formation, cela n’a pas été le cas pour les inactifs.

Les écarts de revenus reflètent les disparités d’accès au travail et la fiscalité. En France, le revenu des 20% les plus pauvres, comme le revenu disponible médian, n’a pas cru de 2008 à 2016. Le système d’allègement de cotisations sociales a certes permis de réduire de façon significative le coût du travail au niveau du SMIC mais les cotisations sociales continuent de peser lourdement au niveau du salaire médian. Les cotisations sociales employeurs en part du salaire brut sont très faibles au niveau du SMIC à 4% avec les derniers allègements, mais celles portant sur le revenu médian s’élèvent à 36%, un écart unique dans les pays de l’OCDE. Même si cela contribue à soutenir de façon bienvenue l’emploi des peu qualifiés, c’est probablement aussi un frein à l’augmentation des revenus entre salaire minimum et médian, ce qui peut expliquer en partie la faible progression du pouvoir d’achat des travailleurs à bas salaires.

Le système de redistribution corrige des inégalités les plus criantes mais bénéficie peu aux classes moyennes. Le système de redistribution en France est important et corrige bien la pauvreté via d’importants transferts vers les ménages les moins aisés. Néanmoins, avant impôts et transferts, les inégalités des revenus de la population sont élevées par rapport à la moyenne de l’OCDE. Le système d’impôts et transferts, incluant les prestations chômage et retraites, ne ramène les inégalités de la distribution de revenus qu’au niveau de la moyenne de l’OCDE. Cela suggère une moins forte redistribution des transferts nets d’impôts en faveur des classes moyennes.

À ces écarts de distribution de revenus, il faut ajouter des dépenses contraintes de logement importantes. Les dépenses de logement constituent un poste de consommation majeur pour les ménages, et la part du logement dans la consommation des ménages en France est supérieure à la moyenne européenne. À nouveau, ceci est corrigé par un parc de logements sociaux développé et par des aides au logement significatives pour les ménages les moins aisés. Cependant, non seulement tous les ménages les moins aisés n’en bénéficient pas, mais c’est encore moins le cas pour les classes moyennes.

En conclusion, la redistribution par les impôts et transferts sociaux est un puissant outil de réduction des inégalités de revenu mais les inégalités d’opportunité sont importantes, largement liées au système éducatif. La redistribution soutient le niveau de vie des ménages les plus pauvres, mais ne corrige pas les disparités au sein du milieu de la distribution. Et surtout, elle ne suffit pas à contrer les inégalités des chances liées au milieu socio-économique ni les inégalités territoriales. L’urgence de redonner la possibilité à chacun de réussir passera d’abord par une réforme du système éducatif, pour assurer que chaque enfant aura la chance de progresser grâce à l’enseignement, la formation, dès le plus jeune âge et tout au long de la vie ; que chaque adulte qui a manqué une marche peut se rattraper. La prochaine étude de l’OCDE sur la France, qui sera publiée en avril, fera des recommandations en ce sens.

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By Orsetta Causa, OECD Economics Directorate, and Anna Vindics and James Browne, OECD Directorate for Employment, Labour and Social Affairs

Income inequality has increased in most OECD countries over the past two decades. This is both because market incomes (wages, dividends, interest income) have become more unequally distributed, and also because redistribution through taxes and transfers has fallen. New OECD work [hyperlink to pol paper, Causa et al 2019] explores cross-country evidence on trends in income redistribution since the mid-1990s to shed some light on the main drivers of the general decline.

New evidence on redistribution and its policy drivers

One finding is that the decline in redistribution was primarily explained by a fall in cash transfers, which in the majority of OECD countries account for the bulk of redistribution (Causa and Hermansen, 2017). In turn, the decline in cash transfers was largely driven by a fall in insurance transfers (e.g. unemployment insurance, work-related sickness and disability benefits). In some countries, this was partly mitigated by an increase in assistance transfers (e.g. minimum income transfers, means- or income-tested social safety net). Personal income taxes also contributed, but played a less important and more heterogeneous role.

To shed light on the underlying drivers, further investigation has been conducted on the basis of both micro-model simulation analysis (Browne and Immervoll, 2019) and regression analysis (Causa et al 2018). The main finding is that policy changes during the past two decades have contributed markedly to the decline in redistribution. This was primarily driven by cuts to cash income support to unemployed households, but also by cuts to the taxation of top incomes and income from capital, as globalisation puts pressure on governments to shift away from highly mobile tax bases. At the same time, not all policy changes went in the direction of reducing redistribution: at lower earnings levels, income taxes have frequently been reduced for low-income working families.

This is not to say that changes in redistribution were entirely the result of changes in policy design.  In several countries, structural factors such as population ageing and changes in the composition of households and unemployment rates have also had an impact. For instance, the extent of redistribution through unemployment insurance transfers fell in countries experiencing a decline in unemployment over the period under consideration. However, the precise contribution of each of these structural factors to the general decline in redistribution is difficult to assess as their impact cannot easily be disentangled from that of policy changes.  

The motivation for the decline in redistribution after the mid-1990s

One objective behind the policy-induced reduction in redistribution has been to raise employment and economic efficiency in particular by strengthening work incentives (make-work-pay policies). In principle, the pursuit of policies to bring more individuals into the job market, especially among low-income households, might have succeeded in boosting growth while at the same time reducing income inequality. In practice, the continued rise in inequality observed in many countries since the mid-1990s suggests that the positive employment effects of the tax and transfer policy reforms on the income of poorer households have not been sufficient to compensate for the reduction in redistribution.

Does this mean that in setting their redistribution policies government inevitably have to choose between more efficiency and less inequality?  Not necessarily.  

First, there is substantial variation in the extent of inequality reduction through taxes and transfers across the OECD area (Figure 1), including between countries that have similar GDP per capita and overall growth performance. Second, cross-country differences in income redistribution do not only reflect the levels of taxes and spending on cash transfers to the working-age population. They also reflect the extent to which personal income taxes are levied progressively with income levels and the extent to which cash transfers target less affluent households (Figure 2).

All this suggests that many OECD countries have scope for making their tax and transfer systems more redistributive without undermining efficiency. However, simply reversing the changes that have led to reduced redistribution is unlikely to be the most effective approach to reducing inequality.

Leveraging synergies between equity and efficiency objectives

Countries can learn from successful reform strategies that have leveraged synergies between equity and efficiency objectives. Such is the case of stepping-up carefully designed in-work benefits and credits: these programmes should be as simple as possible to make them accessible to potential recipients, and associated income support should not be withdrawn too quickly as earnings rise to ensure that work incentives are maintained.

More generally, tax and transfer reforms should be forward-looking, taking into account the rapidly changing context in which policy operates, not least technological developments, changes in the nature of work as well as ageing populations and the associated pressures on government budgets. For example:

  • Social protection systems should adapt to the emergence of non-standard forms of work. Technological change, among other factors, has led to an increase in non-standard form of work and reduced the coverage of traditional social protection systems that are often based on the model of full-time permanent work for a single employer. Alternative approaches might include designing new, tailor-made benefit schemes for non-standard workers, tying social protection entitlements to individuals rather than employment relationships or making social protection more universal.
  • Tax policy also needs to reflect rising top incomes and private wealth among ageing populations along with ongoing progress in international cooperation on taxation.  Although top earners are very responsive to changes in income tax rates, broadening tax bases and improving compliance might be a way to increase the tax collected from this group by limiting the scope for avoidance. The equity and efficiency case for increasing the overall progressivity of tax systems is supported by recent initiatives to enhance international cooperation in tax administration (e.g. automatic information exchange).

Finally, taxes and cash transfers are not the only policies that reduce inequality in OECD countries. A comprehensive strategy for tackling inequality requires policies that promote greater equality in market incomes (i.e. incomes before taxes and transfers), such as providing access to high-quality educational opportunities from early childhood to adult training, healthcare and jobs, especially to those facing disadvantages.

References:

Causa, O. , J. Browne and A. Vindics (2019) “Income redistribution across OECD countries: main findings and policy implications, OECD Economic Policy Papers, No. 23, OECD Publishing, Paris

Causa, O. and M. Hermansen (2017), “Income redistribution through taxes and transfers across OECD countries”, OECD Economics Department Working Papers, No. 1453, OECD Publishing, Paris,
https://doi.org/10.1787/18151973

Browne, J. and H. Immervoll (2018),“Have tax and transfer policies become less inclusive? Results from a microsimulation analysis”, OECD Social, Employment and Migration Working Papers, forthcoming.

Causa, O. A. Vindics and Oguzhan Akgun (2018) “An empirical investigation on the drivers of income redistribution across OECD countries, OECD Economics Department Working Papers, No. 1488, OECD Publishing, Paris https://doi.org/10.1787/18151973

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by Gabriel Machlica, Slovak Republic Desk, OECD Economics Department

The Slovak Republic has one of the continent’s largest Roma populations. Estimates differ, but it is assumed that they account for about 8% of the population The Roma communities vary based upon geographic location and the level of integration. Nevertheless, the average level of ethnic segregation is exceptionally high and Roma face social exclusion in almost every aspect of everyday life (Table 1.1.).

The Roma can be trapped in a cycle of poverty for generations. If a child starts her or his life with limited access to education and lives in poor housing conditions, there is a high probability she will end up in poverty too. Indeed, results for Roma show exceptionally weak upward social mobility between generations. The probability that Roma born in concentrated residential area become unemployed or earn less than minimum wage in irregular work is almost 70%.


Investment in Roma integration cannot only help improve the well-being of disadvantaged groups, but also yield positive fiscal returns from improved employment prospects. The Economic Survey of the Slovak Republic shows that increasing the Roma employment rate and their productivity to the level of the general population by the end of 2060 would increase GDP by more than 12%  with the economy growing faster on average by 0.3 p.p. per year.

References

OECD (2019), OECD Economic Surveys: Slovak Republic 2019, OECD Publishing, Paris,https://doi.org/10.1787/eco_surveys-svk-2019-en

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By David Law, Spain desk, OECD Economics Department

Spain continues to recover from the economic crisis with strong growth and falling unemployment, as highlighted in the latest OECD Economic Survey of Spain (OECD, 2018). If the recovery is to be sustained, it is vital that the benefits of economic growth are shared as high rates of income and wealth inequality can harm economic growth and productivity, and limit productive investment opportunities.

Income inequality is relatively high in Spain (Figure 1) and it increased during the crisis, as employment fell significantly and income disparity grew. The risk of being in poverty now varies greatly across regions and the rate of child poverty is particularly high, at 22% in 2015, which is well above the OECD average of 13%. The risk of poverty is especially high for children living in migrant and single parent families. With some positive developments in the labour market since 2015, income inequality and poverty rates are likely to have improved somewhat, however, these issues are expected to remain a concern for some time.

Wealth inequality in Spain appears relatively low in international perspective, reflecting high rates of home ownership. However, as is the case in other countries, wealth inequality is higher than income inequality with the top 10% of households holding close to half of all wealth, compared to around one fifth for the bottom 60% of households. Wealth inequality seems likely to rise over time, given changes in the distribution of income and recent labour market trends. Indeed, new work undertaken by the OECD using household survey data shows that wealth inequality already increased between 2011 and 2014 in Spain, and that the income and wealth mobility of households exhibit a degree of persistence, which can exacerbate inequalities (Martinez-Toledano et al., forthcoming).

The tax and transfer system in Spain could do more to tackle inequality. Low-income households receive less cash transfers than higher-income ones, with those in the bottom 20% of the income distribution receiving only around 55% of the average payment across all families, compared to the top 20% receiving over 60% more than the average family (Figure 2). Better targeting of transfers, so more is received by those who need them the most, would reduce inequality. Additionally, the 2018 OECD Economic Survey of Spain notes the burden the tax system places on labour taxation and recommends that regressive reduced value-added tax rates be abolished and that the tax allowances granted for inheritance taxes for the most wealthy are reconsidered.

Reducing inequality in the long-run will also require sustained improvement in labour market outcomes. For instance, in 2017, unemployment among the young was 38.6%, long term unemployment as a share of the labour force was 7.7% and 27% of workers were on temporary contracts. The 2018 OECD Economic Survey of Spain makes a number of recommendations in this regard. For example, the Survey recommends increasing spending on training and job search assistance, the introduction of a profiling tool to adapt active labour market programmes to the needs of individual workers, and measures to boost the labour market participation of women, such as extending the provision of early childhood education. The Survey also discusses the role that targeted reductions in social security contributions could play in improving labour market outcomes for low wage workers and the benefits of greater use of firm-level collective agreements, and recommends continuing efforts to fight against the abuse of temporary contracts to reduce labour market duality.

References

OECD (2018), OECD Economic Surveys: Spain 2018, OECD Publishing, Paris. https://doi.org/10.1787/eco_surveys-esp-2018-en.

Martínez-Toledano, C., D. Law, D. Haugh and M. Adalet McGowan (forthcoming), “The Business Cycle and Wealth and Income Mobility in Spain”, OECD Economics Department Working Papers, forthcoming.

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By Müge Adalet McGowan, Spain desk, OECD Economics Department

Ensuring the benefits of growth are spread widely requires a strong focus on greater convergence of regions in terms of income and well-being. The GDP per capita in the best performing region was around double that in the worst performing region in 2016. Income inequality and poverty rates are also high, with regional differences.

High regional dispersion in education and job outcomes, compounded by low inter-regional mobility, emerge as key drivers of regional inequalities in income and well-being (Figure 1). At the same time, productivity growth has stagnated in Spain (Figure 2). Barriers to achieving a truly single market limit productivity growth of regions, including the most advanced. Hence, the 2018 OECD Economic Survey of Spain highlights that a dual approach of enhancing both the productive and employment capacities of lagging regions is needed (OECD, 2018). Reducing regional disparities will also depend on effective coordination and sharing of best practices across regions.

Stronger coordination between employment and social services is key to providing effective transitions between social support schemes and employment, given the multiple barriers that the unemployed might face (Fernandez et al., 2018). Improving coordination to provide integrated support for jobseekers via a single point of contact for social and employment services and assistance would improve the effectiveness of such policies.

Lack of full portability of social and housing rights across regions, due to prior residency requirements, contributes to low labour mobility. The 2018 OECD Economic Survey of Spain recommends ensuring full portability of these benefits across regions, by providing temporary assistance either by the region of origin or the central government.

Increasing the quality of education would improve the employability of the labour force in lagging regions and should be complemented with policies to raise job quality in regions with low-skilled jobs. For example, providing individualised support to students at the risk of failing at an early stage has contributed to lower early school leaving rates in some regions. Increasing the adaptability of workers, via lifelong learning policies better targeting the participation of low-qualified adults, would improve the matching of skills to labour market needs.

Reducing regional regulatory differences is key to achieving a truly single market and firm growth. The 2018 OECD Economic Survey of Spain recommends strengthening the implementation of Market Unity Law through enhanced cooperation and coordination across different levels of government and the assessment of the compliance of new legislation at all levels of government with the principles of the Market Unity Law. Removing the remaining barriers in some professional services would also improve competition and boost productivity.

References:

OECD (2018), OECD Economic Surveys: Spain 2018, OECD Publishing, Paris. https://doi.org/10.1787/eco_surveys-esp-2018-en.

Fernandez, R., et al. (2018), “Faces of Joblessness in Spain: A People-centred perspective on employment barriers and policies”, OECD Social, Employment and Migration Working Papers, No. 207, OECD Publishing, Paris, https://doi.org/10.1787/6149118d-en.

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by Laurence Boone, OECD Chief Economist

For some, the financial crisis was an eye-opener exposing the inequalities in life chances between those with the right skills and those without, between those born and educated in the right places and those who were not.  But for many others the growing gap in well-being has been a reality for decades.

Widening inequalities threaten economic growth, undermine trust in government and democracy, and fuel discontent with the multilateral rules-based system of market economies.

Governments can and should seek to reverse the trend towards growing inequality and ensure that  economic growth benefits everyone. Making trade and digitalisation work for all is not about idealism: it is about improving people’s standard of living, boosting opportunities for inter-generational mobility and ensuring a brighter future for all.

The OECD has developed a whole-of-government approach, built around analysis of policies and strategies to ensure that the fruits of economic growth are better shared across society. We identify comprehensive policy packages that optimise gains in GDP and households incomes, including among the less well off.

There are no one-size-fits-all reform packages, but key principles can guide policy-making for inclusive growth by targeting three broad areas for action: firms, skills and workers.

  • Firms: to promote business dynamism and the diffusion of knowledge by, for instance, lowering barriers to market entry or improving the efficiency of the corporate tax system.
  • Skills: by fostering higher quality education and greater innovation and through better-adapted R&D policies so that innovation fosters productivity gains across all types of activities.
  • Workers: with policies that ensure workers benefit from a fast-evolving labour market, including those who are most vulnerable to the changing demand for skills and automation, or who have less bargaining power.

The principles build on extensive OECD empirical research into the effects of pro-growth structural policy reforms on household disposable incomes. This research highlights the trade-offs between productivity gains and inequality when they appear, as well as possible synergies between efficiency and equity.

The policies needed to raise equality of opportunity are clear. It is striking that a child whose parents did not graduate from secondary school has only a 15% chance of doing so himself or herself, compared to a 65% chance for more well-off children.  Equality of opportunities can foster social mobility: an equal access to education, finance, jobs, health, transport and other public services helps compensate for the environment in which people were born. Good quality education is primordial throughout life – especially early childhood education, but also training at work, which too often benefits those already well educated.

Other reforms have more ambiguous effects on efficiency and equity. Policies which reduce labour costs by lowering unemployment benefits increase employment, but also make the vulnerable more fragile when there is an economic downturn. Meeting the twin objectives of raising employment while mitigating the negative consequences on poor households requires well-targeted active labour market policies to enhance the employability of low-skilled workers, the long-term unemployed and discouraged job seekers.

Some policies have more ambiguous effects: raising the minimum wage reduces inequality, just as stronger unions may strengthen workers’ bargaining position.  When firms have the option of investing in automation technology,  striking the right balance between bargaining power and the economic environment is  crucial to preserving employment with appropriate wage gains.

Spurring productivity, by easing barriers to firm entry and competition in product markets, supports GDP growth gains without exacerbating inequality, but only to the extent that the associated job gains are fairly equally shared across households. This requires the distributional effects of higher employment – which tends to benefit the less affluent households disproportionately – to more than offset those of higher labour productivity, which tends to benefit  the wealthiest households.

Inclusive growth also requires devoting careful attention to transition. Opening markets to trade or progress in technology inevitably leads to the decline of certain companies and obsolescence of particular skills. Accompanying measures – building on an active partnership between employers and governments, often at the regional level – can help workers and strengthen trust in the protective capacity of governments. Safety net packages and trampoline policies for keeping workers in the labour markets are all relevant. For example, in Sweden, job security councils, founded by employers, assist workers whose employment is put at risk when firms restructure. The programmes have enabled  85% of displaced workers to find a new job within a year, a higher rate than any other OECD country. Conversely, the US Trade Adjustment Assistance and the EU Globalisation Adjustment Fund, which lack such partnerships, have barely benefitted those affected by the displacement of economic activities.

It is important to acknowledge that transitional policy responses have limits. This is especially the case for persistent shocks concentrated in specific regions, sectors or skills. When distributional effects are persistent, direct fiscal policy measures may be needed to restore equity and opportunity. These may include well-designed wealth and inheritance taxation, paying particular attention to the progressivity of the tax system, and better targeting social benefits towards those who need those most. Separately at the global level, the international  programme to tackle Base Erosion and Profit Shifting (BEPS) and increase information transparency of the tax system will help strengthen the level-playing field and ensure a fair share of firms’ revenues is allocated to where value added is produced. This will help stabilise government revenues and ensure redistribution  benefits to those who need it most, but perhaps more importantly may help increase trust in multilateral cooperation.

Sustained growth is a pre-condition for improving living standards and job creation, but sustainability depends on an effective and perceived broad sharing of the growth dividends. The OECD has been promoting an inclusive growth framework based on three pillars: equal opportunities, business dynamism and inclusive labour markets, efficient and responsive governments. Implementation needs to start today.

References:

OECD (2018), Opportunities for All: A Framework for Policy Action on Inclusive Growth, OECD Publishing, Paris, https://doi.org/10.1787/9789264301665-en.

Causa, O., M. Hermansen and N. Ruiz (2016), “The Distributional Impact of Structural Reforms”, OECD Economics Department Working Papers, No. 1342, OECD Publishing, Paris, http://dx.doi.org/10.1787/5jln041nkpwc-en.

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By Orsetta Causa, OECD Economics department

Income inequality has increased in most OECD countries over the past two decades. This has come about both because incomes before taxes and transfers have become more unequally distributed, and because the extent of redistribution through taxes and transfers has fallen (“Income redistribution through taxes and transfers across OECD countries”). A new OECD paper by Orsetta Causa, Anna Vindicis and Oguzhan Akgun provides an empirical investigation on the drivers of the widespread decline in income redistribution across OECD countries over the last two decades.

The results suggest that the size of the redistribution system plays a major role for income redistribution, in particular on the spending side, confirming previous OECD findings. Hence, the relatively widespread decline on cash transfers to the working-age population is found to have contributed to the decline in income redistribution to the working-age population.

On the revenue side, the empirical analysis uncovers an interaction between increased economic integration and the capacity of personal income taxes to reduce income inequality. Indeed, the results suggest that stronger trade ties across countries have made a given level of tax receipt through personal income taxes less effective at reducing income inequality. The estimated marginal effect of the personal income tax to GDP (PIT-to-GDP) ratio on redistribution thus depends on the degree of countries’ openness (Figure 1): for around half of OECD countries, the effect of the PIT-to-GDP ratio on redistribution is significantly positive but this effect declines with openness levels. For a country at the OECD average level of trade openness, a one percentage point increase in the PIT-to-GDP ratio is associated with a 2% increase in redistribution. For the countries for which such effect is statistically significant, it ranges from 3.7% (USA) to around 1.5% (Korea).

For a given overall size of the tax and transfer system, the estimation results suggest that changes in specific tax and transfer instruments have contributed to the decline in redistribution. Most important among these are:

  • Reductions in the progressivity of personal income taxes, driven by a flattening of the tax schedule in the upper-part of the wage distribution as well as by a decline in top personal income tax rates and in the taxation of dividend income at the personal level.
  • Reductions in the generosity and duration of unemployment-related transfers, including cuts to social assistance for the long-term unemployed, which have often taken place in combination with increases in spending on active labour market policies. This finding is thus likely to reflect the effect of policy reforms to boost work incentives among target groups and to shift from passive to active support for the unemployed.

At the same time, not all policy changes went in the direction of reducing redistribution: the decline in redistribution has been partly mitigated by progressive family-friendly policies, such as widespread increases in spending on early education and childcare, as well as by tax cuts to low wage earners.

These estimates are used to simulate the income redistribution effect of selected tax and transfer reform scenarios, taking into account the countries’ relative starting point in each policy area. Transfer reform scenarios deliver larger effects than tax reform scenarios. The scenarios consistently point to major redistribution gains in countries where social spending on working-age population is relatively low and/ or weakly targeted to low-income households (Figure 2). Increases in long-term unemployed- related transfers to married couples deliver major redistribution gains where these transfers are low or non-existent  (e.g. Chile, Greece, Italy, Turkey and the United States)  The magnitude of these effects reflects the large implied size of the simulated reforms for these countries and should therefore be interpreted in light of alternative policy objectives, in particular efficiency objectives in terms of job search incentives, alongside budgetary constraints.  Still, those same countries that exhibit comparatively low passive support for the long-term unemployed tend to also exhibit comparatively low active support. As a result, policy packages that would combine more generous cash transfers with more effective activation and training for jobseekers would likely meet equity and efficiency objectives. The United States and Turkey would also boost redistribution by increasing spending on early education and childcare; and so would Mexico and Japan. This would not only increase redistribution but also help narrowing gender gaps and curbing child poverty. Reforms to enhance access to quality childcare for disadvantaged families are likely to maximise policy synergies between efficiency and equity.

References: 

Causa, O., A. Vindics and O. Akgun (2018), “An empirical investigation on the drivers of income redistribution across OECD countries“, OECD Economics Department Working Papers, No. 1488, OECD Publishing, Paris, https://doi.org/10.1787/5cb47f33-en.

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Mr. Jon Pareliussen, Economist, Sweden/Finland desk, Economics Department

The Nordics are rightly renowned for being inclusive societies with low inequality compared to other OECD countries. However, some of the largest inequality increases over the past few decades took place in Sweden, Finland and Denmark. A newly released article  building on previous OECD work discusses how market forces, demographic trends and redistribution together shaped the income distribution of the Nordics.

It may seem like a paradox that the Nordics, which are very open economies, heavily integrated in global value chains and front-runners in the use of new technologies, have not seen even more widening distributions of market incomes. However, the extent to which skill-biased technological change and other forces widening the earnings distribution of workers will actually drive up inequality depends on a number of factors, and key policies and institutions in the Nordics play a dampening role. First, institutions such as unions and collective bargaining, employment protection legislation and minimum wages dampen the direct effect of market trends on earnings. Second, higher demand for skills are met by publicly-funded higher education, increasing the supply of skilled workers and thus holding back skills premiums. Third, a widening earnings distribution among workers coincided with increasing employment, limiting the overall effect on inequality.

With a relatively modest overall impact from market forces, explanations for increasing inequality must be sought elsewhere:

  • Demographic trends have been relatively strong drivers of inequality in the Nordics. Household structure, with more single-headed households has widened income dispersion in Denmark, Finland, Norway and Sweden. Ageing has increased inequality significantly in Finland, and immigration has increased inequality in Norway, Denmark and Sweden.
  • Redistribution through taxes and transfers has weakened significantly in Denmark, Finland and Sweden, notably due to less insurance transfers (i.e. unemployment, sickness, disability insurance) and only partially offset by more assistance (i.e. means-tested) transfers. Income taxes have played a less important and more heroegneous role, as progressivity increased in Sweden while it decreased in Denmark and Iceland.

Technological and demographic pressures are set to continue going forward, and these challenges need to be embraced. Continued flexibility and constructiveness of the social dialogue and improvements to education are essential to seize opportunities from technological change and avoid a widening wage distribution. Making social insurance and welfare transfers more flexible and agile would improve workers’ protection in a rapidly changing world of work. Improving benefit system design so that work always pays, notably in Denmark and Finland, and linking benefits to real-time income registries are important steps to this end.

The Nordics demonstrate that equity and efficiency can be compatible if incentives are right. Low inequality and strong safety nets can even be an advantage in today’s globalised world, which requires constant adaptation. Reaping the full benefits from globalisation and technological progress requires broad support, which is easier to muster when the social dialogue is constructive and representative, when everyone is given opportunities to fulfil their potential, risks are shared and losers compensated.

References:
Pareliussen, J. K., Hermansen, M., André, C. and Causa, O. (2018), Income Inequality in the Nordics from an OECD perspective, Nordic Economic Policy Review 2018.

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by Hansjörg Blöchliger and Vassiliki Koutsogeorgopoulou, Lithuania Desk, OECD Economics Department

Lithuania is one of the fastest growing economies in the OECD. After a strong rebound in 2017, growth is set to average more than 3% over this year and the next led by buoyant investment. Falling unemployment and rapidly increasing wages support consumption, although a shrinking labour force weighs on growth. Export growth remains solid, although below last year’s peak. Following 10 years of deficits and rising debt, the budget moved to a small surplus in 2016 and has remained positive since then. Lithuania is considered one of the most open and business-friendly economies in the OECD, and financial markets are stable.

Important challenges remain. Productivity is still about 30 percent below the OECD average, even if some recent pick up is encouraging. Export performance has improved but exports are concentrated in low-medium value-added activities and integration into global value chains is weak. Skills often do not match needs by businesses and collaboration between firms and research institutions is weak. Most disquieting, emigration – mostly of the young – continues, depriving the country of its most dynamic people and contributing to skills shortages.

Inequality and poverty are high reflecting widespread labour informality and a pension system that leaves many elderly with low incomes.

The “New Social Model” is Lithuania’s most impressive achievement of the past few years to enhance productivity and inclusiveness. The reform made the labour market more flexible, protects better the unemployed, and ensures sustainability of the pension system. The New Social Model is “inclusive” in the best sense of the word. The reform is also a showcase on how to achieve a large reform with a difficult political process, by creating a win-win situation.

Lithuania should continue its reform vigour to boost productivity and inclusiveness further. Reforms should focus on improving the business environment and making firms more dynamic, including through a more efficient insolvency regime, and by making the education system more responsive to labour market needs. More and better-quality jobs in the formal sector are key to well-being and reducing poverty. More effective support for those in need and active labour market programmes would also help combat poverty. Finally, easing the rules for highly skilled immigrants could help address the negative consequences of emigration, as could strengthening social and economic ties with the Lithuanian diaspora. These issues and policies to address them are analysed in the 2018 Economic Survey of Lithuania.

Further reading

OECD (2018), OECD Economic Surveys: Lithuania 2018, OECD Publishing, Paris.

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