2014.11.20 - naec seminar - microstability

EFFECTS OF GROWTH-

ENHANCING POLICIES ON

MICROECONOMIC

STABILITY

Boris Cournède, Paula Garda, Peter Hoeller, Volker Ziemann

Public Economics Division of the OECD Economics Department

NAEC Seminar, 20 November 2014

The impact of reforms on instability: an

integral part of NAEC

• OECD Going For Growth publications have recognised side-

effects of growth-promoting policies on income inequality, the

environment, government budgets and external accounts.

• The recent financial crisis has underlined the damage that

economic instability can inflict on welfare.

• Looking at macroeconomic stability is not enough.

• This study moves one step closer to people and analyses

microeconomic stability focusing on firms, households and

individuals.

• Instability also affects growth and social mobility.

Microeconomic volatility and inequality

are tightly linked

Cross-sectional standard deviation of household disposable income growth and Gini coefficient, 2005-10

• Both influence welfare through similar channels

• Microeconomic volatility tends to be higher in more unequal

countries

Source: OECD (2014, forthcoming).

AUS

AUT

BEL

CAN

CZEDEU

DNK

ESP

EST

FIN

FRA

GBR

GRC

HUN

ITA

KOR

LUXNLDNOR

POL

PRT

SVK

SVN

SWE

USA

20

25

30

35

40

45

50

55

60

0.22 0.27 0.32 0.37 0.42

Mic

roec

onom

ic v

olat

ility

, %

Income inequality

Volatility can be measured in different

ways at the micro level

• Rolling window: fluctuations are measured for each individual

around average growth. Very natural but few degrees of

freedom (estimation risk).

• Incidence of large changes: the measure counts the

proportion of people who undergo large changes (here,

greater than 20%). It allows separate analyses of large

increases and decreases.

• Cross-sectional measure: it evaluates the dispersion of

individual changes around the average. It is less demanding

on the data but implicitly assumes constant average growth

across the population (model risk).

• The three measures are very highly correlated: correlation

coefficients are very high and 99% statistically significant.

Greater microeconomic volatility is

associated with poorer life satisfaction

Source: OECD Better Life Index and OECD (2014, forthcoming).

AUS

AUT

BEL

CAN

CHE

CZE

DEU

DNK

ESP

EST

FINFRA

GBR

GRC

HUN

ITA

KOR

LUX

NLD

NOR

POL

PRT

SVK

SVN

SWE

USA

0

1

2

3

4

5

6

4 4.5 5 5.5 6 6.5 7 7.5 8

Mac

roec

onom

ic v

olat

ility

Life satisfaction

AUS

AUTBEL

CAN

CHE

CZEDEU

DNK

ESP

EST

FIN

FRA

GBRGRC

HUN

ITA

KOR

LUX

NLD

NOR

POL

PRT

SVK

SVNSWE

USA

20

25

30

35

40

45

50

55

60

4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0

Mic

roec

onom

ic v

olat

ility

Life satisfaction

Cross-sectional standard deviation of household disposable income growth and self-reported life satisfaction, 2005-10

Volatility is very different at the micro

and macro level

Note: Each observation represents a country at a specific year for the period 1994-2010. Microeconomic volatility is measured by the cross-sectional standard

deviation of disposable income growth across households in a given country. Macroeconomic volatility is calculated as the 3-year rolling standard deviation of

real disposable income growth measured in the national accounts.


• Household-level disposable income volatility is much higher than at

the aggregate level.

• There is no cross-country correlation between macroeconomic and

microeconomic volatility:

0

10

20

30

40

50

60

70

80

0 2 4 6 8 10 12

Mic

roec

onom

ic v

olat

ility

, %

Macroeconomic volatility, %

Line y=x

Changes in economic

conditions

- Financial and trade openness

- Product market regulation

- Financial market regulation - Network structure

1

Firm-output volatility

- Bankruptcy legislation

- Creditor rights

- Labour market policies

- Wage flexibility

3

Firm

turnover

Employment

volatility

- Barriers to entrepreneurship

- Wage bargaining (risk premia, bonuses)

- Tax and benefit system

- Labour market policies

- Financial markets (insurance, credit)

6 7

Earnings

volatility

Earnings

growth

12 11 10

Consumption volatility Consumption growth

- Level of risk aversion

− +

Welfare

13

2 4

8

5

9

Mapping policy influences on micro-

level volatility and economic welfare

Regulatory settings differ between countries with

high and low firm turnover

Source: Bartelsman, Haltiwanger and Scarpetta (2013) and OECD (2014, forthcoming).

-0.9

-0.7

-0.5

-0.3

-0.1

0.1

0.3

0.5

Government ownership(BR)

Barriers to competition(PMR)

Barriers to trade andinvestment (PMR)

Public ownership (PMR)

EPL (temporary contracts)

EPL (regular workers)

Low turnover

High turnover

Many steps lead from individual labour earnings

to household disposable income


Individual labour income

Household labour income

Household market income

Household disposable

income

Capital incomeFamily formation and composition

Taxes and cash transfers

Hours worked

and hourly labour income

Worker-level instability takes different forms


• Changes in jobs (including into or out of employment),working-time or hourly earnings.

• All three forms of economic instability are high and varyconsiderably across countries.

Worker reallocation rates Volatility in hours worked and hourly labour earnings

0

5

10

15

20

25

30

GR

C

LUX

CZE ITA

HU

N

SVK

PR

T

BEL

SVN

DEU ES

T

CH

E

AU

T

FRA

PO

L

NLD

GB

R

IRL

SWE

FIN

NO

R

ESP

ISL

AU

S

DN

K

2007 1995

AUS

AUT

BEL

CAN

CHECZE

DEU

DNK

ESP

EST

FIN

FRA GBR

GRC

HUN

IRL

ITA

KOR

LUX

NLD

NOR

POL

PRT

SVKSVN

SWE

USA

15

20

25

30

35

40

45

15 20 25 30 35 40

Cross sectional standard deviation in hourly earnings within a full time jobCro

ss s

ecrio

nal s

tand

ard

devi

atio

n in

ann

ual h

ours

Three types of empirical analysis have

been pursued

Panel data econometric investigation of individual-level data

covering 26 countries from 1994 to 2010

• Country-level aggregate measures of individual volatility

• Individual-level measures of volatility

are regressed on policy indicators and other relevant

factors. Regressions include country and time fixed-effects.

• Sector-level regressions provide indications about

causality

Empirical results of policy effects on

micro-level volatility

The findings regarding EPL and PMR suggest that countries with tight

policy settings may find themselves in “gradual-reform traps”:

• Marginal growth-enhancing reforms can come at the cost of

increasing instability;

• Deeper reforms can boost growth without increasing instability.

Worker reallocation

Volatility of annual hours worked

Volatility of hourly earnings

Employment protection (regular workers) * *** *

Centralisation of wage bargaining *** ***

Generosity of unemployment benefits * *

Active labour market policies **

Product market regulation **

Credit intermediation *** *** ***


Hourly earnings volatility decreased

after Estonia relaxed EPL considerably

Note: The curve shows the estimated relationship between the volatility of hourly earnings measured as cross-sectional standard deviation of labour income

growth across individuals the and EPL, based on the estimates of panel data regressions at the country level for the period 1996-2010. See Cournède et al.

(2014) for details on the empirical strategy and detailed estimates. Volatility of hourly earnings is measured using the cross-sectional standard deviation.

Rectangles are data for Estonia pre-reform (average 2006-09) and post-reform (2010). The vertical line shows the OECD average for the EPL indicator for

2010.


EST 2010

EST 2006-09

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.3 0.8 1.3 1.8 2.3 2.8 3.3 3.8 4.3

EPL

Vol

atili

ty o

f hou

rly e

arni

ngs

OECD average

Large changes in individual labour

earnings are strongly attenuated…

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

SW

E

SV

N

NO

R

DN

K

NLD FIN

BE

L

DE

U

CA

N

FR

A

CH

E

CZ

E

LUX

AU

T

HU

N

IRL

PR

T

AU

S

SV

K

GB

R

GR

C

ES

T

ITA

ES

P

US

A

KO

R

PO

L

Probability of avoiding a large (20%) change in household income when experiencing a

large change in labour earnings, 2005-10


…largely owing to other household

members and tax-and-transfer systems


Decomposition of the change in household disposable income when the income

of the household head drops by more than 20%

-100

-80

-60

-40

-20

0

20

40

60

80

AU

S

AU

T

BE

L

CA

N

CH

E

CZ

E

DE

U

DN

K

ES

P

ES

T

FIN

FR

A

GB

R

GR

C

HU

N

IRL

ITA

KO

R

LUX

NLD

NO

R

PO

L

PR

T

SV

K

SV

N

SW

E

US

A

Taxes K inc Transfers Indiv labour earnings Other HH members labour earnings Disposable income

Tax-and-benefit systems differ between

high and low attenuation countries


-1.5

-1

-0.5

0

0.5

1

1.5Total taxes/GDP

Personal income tax

Property tax

Social contributions

Consumption taxes

Total socialexpenditure/GDP

ALMP

Unemployment benefits

Family cash transfers

Tax progressivity

Unemployment benefitprogressivity

Cash transfer progressivity

High Low

Size and cash transfer mix

1

1

12

2

2

1

Many pro-growth reforms raise trade-offs

with stability and inequality

Effect of change on:

A pro-growth change: Income equality

Micro-level stability

Easing EPL for regular workers + Increasing product market competition +1 Boosting ALMP spending + + Lowering unemployment insurance replacement rate +2 -

Reducing the total tax-GDP ratio - - Reducing the size of social transfers - - Reducing PIT progressivity - -

1. Earlier results were mixed, but recent evidence points to overall reduction in inequality (OECD, 2015).

2. Overall inequality diminishes owing to employment effects. However, cutting benefits going to groups with low employment

prospects can increase inequality.

Source: Joumard et al. (2014), OECD (2014, forthcoming), OECD (2015).

The growth-volatility frontier provides an

exploratory tool to analyse this trade-off

Note: Trend per capita disposable income growth is calculated with aggregate national accounts data. Household disposable income growth volatility is derived

from household surveys and is corrected for year-fixed effects.

Source: Cournède, Garda and Ziemann. (2014, forthcoming).

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0.15 0.2 0.25 0.3 0.35 0.4 0.45

Cross-sectional volatility of real disposable income growth

Tren

d re

al d

ispos

able

per

cap

ita in

com

e gr

owth

Policy settings appear linked to the

distance to the growth-volatility frontier

Note: All policy indicators are standardised and centred. Estimation based on a sample of 173 observations across 21 countries. Time-fixed and country-fixed effects

are included. The shapes indicate the estimated relationship between policy estimators (rows) and the distance to the frontier (columns). Stars reflect confidence levels

for the linear and squared term: ** stands for for 95% and * for 90%.If significance differs between the linear and squared terms, the lower level is shown. For

employment protection and the credit intermediation ratio only the squared term is significant.

Source: Cournède, Garda and Ziemann. (2014, forthcoming).

Link with distance to growth-

volatility frontier

Looser employment protection

Higher pending on ALMPs *

Lower unemployment benefit replacement rates

**

Less centralisation in wage bargaining

**

More competitive product market regulation

The detailed results are available in:

• OECD (2014), “Effects of Pro-Growth Policies on the Economic

Stability of Firms, Workers and Households,” OECD Economic Policy

Papers, forthcoming.

• Garda, P. and V. Ziemann (2014), “Economic Policies and

Microeconomic Stability: A Literature Review and Some Empirics,”

OECD Economics Department Working Papers, No. 1115.

• Cournède, B., P. Garda and V. Ziemann (2014), “Effects of Economic

Policies on Microeconomic Stability,” OECD Economics Department

Working Papers, forthcoming.

Additional references:

• Joumard, I, P. Hoeller and I. Koske (2014), Income Inequality in

OECD Countries: What are the Drivers and the Policy Options, World

Scientific Publishing.

• OECD (2015), Going for Growth: Economic Policy Reforms in OECD

Countries.

2014.11.20 - naec seminar - microstability

Economy & Finance