Structural perspectives on European

employment, productivity and growth

in a global context

Sintra, Portugal, 23 May 2015

Catherine L. Mann OECD Chief Economist

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Key messages

Prolonged weak demand has left many European economies with heavy public debt burdens, low investment and slow potential growth

Improved structural policies, in the context of active demand management, would address these challenges

Some structural policies could also help to contain inequality

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1. Euro-area 15 countries. Source: Preliminary June 2015 OECD Economic Outlook database (STEP97).

High public debt ratios are one

legacy of the crisis

From the onset of the crisis, debt ratios were pushed up by higher deficits, financial rescue packages and slow (or negative) nominal GDP growth

Bringing them back to prudent levels is among the challenges facing European economies

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65

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75

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85

90

95

100

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65

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75

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85

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100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

A. General government gross debt, Maastricht definition Per cent of GDP

-4

-2

0

2

4

6

8

10

12

-4

-2

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

B. Components of annual change in debt-to-GDP ratio Percentage points

Nominal GDP growth Nominal debt increase Change in debt/GDP ratio

Public debt dynamics in the euro area1

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Sluggish investment has been a factor

preventing growth from reducing debt burdens

Weak business investment post-crisis mostly explained by subdued demand

Economic/policy uncertainty has fallen, but still a drag on investment

Restrictive financing conditions pertained in some countries, especially early on in the crisis

OECD work finds that restrictive product market regulation hinders investment

Public investment, potential higher multipliers, has often been cut to meet fiscal consolidation objectives -10 -8 -6 -4 -2 0 2 4

Australia

Canada

Sweden

United States

Germany

United Kingdom

Netherlands

France

Japan

Ireland

Spain

Italy

Portugal

Greece

Non-residential fixed investment Volumes, average annual percentage change from

2007 to 2014

Note: Non-European countries in blue. Source: Preliminary June 2015 OECD Economic Outlook database (STEP97).

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Low investment explains much of the

post-crisis slowdown in potential growth

Growth of OECD potential output per capita Contribution of components in percentage points

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Active population rate ² Potential employment rate¹

TFP Capital per worker

Potential per capita growth

1. Potential employment as a share of the working-age population (15-74). 2. Share of the population of working age in total population. Source: Preliminary June 2015 OECD Economic Outlook database (STEP97).

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Constructive collective action with regulatory harmonisation would generate positive externalities

• Recent OECD work suggests that cutting the heterogeneity of product market regulation by one fifth could increase intra-EU FDI by about 20%

The Plan offers common vocabulary and spending

• Acts on supply and demand sides

• Outlays by national governments to the European Fund for Strategic Investment (EFSI) not counted under deficit rules

€21 billion in guarantees from EC and EIB for €60 billion in EIB bond issuance to seed the EFSI; target of €315 billion of new investment over 3 years

In the context of weak investment, the

Juncker Plan could be a useful initiative

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Solid growth at the global productivity frontier but spillovers disappoint Labour productivity; index 2001=0

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries ” forthcoming OECD Working Paper.

TFP growth has also slowed, with

diffusion one apparent problem

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Structural factors shape diffusion

Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier:

Industry Level Evidence”, OECD Economics Department Working Papers, forthcoming.

Globalisation Reallocation Knowledge-Based Capital

Estimated frontier spillover (% p.a.) associated with a 2 percentage point increase in MFP growth at the global productivity frontier

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Note: The figure shows the percentage of workers who are either over- or under- skilled and the simulated gains to allocative efficiency rom reducing skill mismatch in each country to the best practice level of mismatch. The figures are based on OECD calculations using OECD Survey of Adult Skills (2012). Source: M. Adalet McGowan and D. Andrews (2015), "Labour Market Mismatch and Labour Productivity: Evidence from PIAAC Data" OECD Economics Department Working Paper No. 1209.

Reducing skill mismatches is a promising

avenue for boosting productivity

Potential gains from reducing skill mismatch

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0

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15

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POL CAN BEL SWE USA FRA NLD DNK JPN FIN EST KOR GBR NOR SVK AUS DEU AUT IRL CZE ESP ITA

Percentage of workers with skill mismatch (LHS)

Gains to labour productivity from reducing skill mismatch (RHS)

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Note: The dot is the average probability to have mismatch evaluated at the median level of the policy and individual characteristics. The distance between the Min/Max of the relevant policy indicator and the median is the change in the probability of skill mismatch with the respective policy change. Source: M. Adalet McGowan and D. Andrews (2015), "Labour Market Mismatch and Labour Productivity: Evidence from PIAAC Data" OECD Economics Department Working Paper No. 1209.

Skill matching affected by structural

policies and business environment

Framework policies and the probability of skill mismatch

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-3

-2

-1

0

1

2

3

average

median

lower-middle class

poor

Structural reforms and change in household disposable income Scaled relative to 1pp increase in GDP per capita in the long run

Source: OECD Economics Department Working Paper 1180. Can pro-growth policies lift all boats? An analysis based on

household disposable incomeBy Orsetta Causa, Alain de Serres and Nicolas Ruiz.

Structural policy choices

also affect inequality

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Summing up

Mutually reinforcing macro and structural policies in Europe are needed to revive investment, employment and TFP growth

Collective action by the EU/EA could generate positive externalities

Choosing the right pro-growth structural policies can mitigate inequality as well