www.oecd.org/eco/do-pro-growth-policies-generate-economic-instability-for-

households.htm

OECD

OECD Economics

Do pro-growth policies generate

economic instability for

households?

Paris, 7 April 2015

Why does household-level economic

instability, measured by microeconomic

volatility, matter?

Greater household economic instability

is linked with poorer life satisfaction

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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

AUS

AUTBEL

CAN

CHE

CZEDEU

DNK

ESP

EST

FIN

FRA

GBRGRC

HUN

ITA

KOR

LUX

NLD

NOR

POL

PRT

SVK

SVN SWE

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 (0 to 10)

Household economic instability is

greater in more unequal countries

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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

AUS

AUT

BEL

CAN

CZE DEU

DNK

ESP

EST

FIN

FRA

GBR

GRC

HUN

ITA

KOR

LUX

NLD

NOR

POL

PRT

SVK

SVNSWE

USA

20

25

30

35

40

45

50

55

60

0.22 0.24 0.26 0.28 0.3 0.32 0.34 0.36 0.38 0.4

Mic

roec

onom

ic v

olat

ility

, %

Income inequality, Gini (0 to 1)

Household economic instability can be

assessed with different volatility measures

• 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.

Instability is much greater at the

household level than at the macro level

• 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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

Worker-level instability takes different forms

(1/2)

First: worker reallocation, measured here as hirings plus

separations, minus net employment creation, divided by two, in %

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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

Worker-level instability takes different forms

(2/2)

• Second: working-time volatility;

• Third: hourly earnings volatility.

These second and third forms of instability are highly correlated:

Worker reallocation rates Volatility in hours worked and hourly labour earnings

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

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

Hourly earnings volatility within a full time job, %

Ann

ual h

ours

wor

ked

vola

tility

, %

What are the impacts of economic

policies on microeconomic instability?

Regulatory settings influence the instability

experienced by firms

-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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

Three types of empirical analysis have

been pursued for worker-level instability

Panel data econometric investigation of data on individual

workers and households 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

The empirical results show the

presence of “marginal-reform traps”

The findings regarding employment protection and product marke

regulation suggest that countries with tight policy settings may find

themselves in “marginal-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 *** *** ***

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

Hourly earnings instability 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.

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

…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%, per cent

-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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

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

Source: Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on theEconomic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

Do pro-growth reforms improve or harm

economic stability for households?

Some pro-growth reforms often

generate instability

• Making taxes or social transfers less progressive,

• Reducing unemployment benefits, or

• Incrementally easing very tight restrictions on lay-offs or competition for goods and services

usually increases economic volatility for households.

19

But this trade-off can in some cases be

overcome by being bold enough:

Replacing tight restrictions on

• layoffs or

• competition for goods and services

with pro-competive policies usually improves

household-level income stability.

20

Some pro-growth reforms bring

economic stability:

• Moving from moderately tight to flexible

policy settings in product and labour

market regulation

• Stepping-up training programmes and job-

search support for unemployed workers

usually reduces household-level economic

volatility.

21

More Information…

http://www.oecd.org/eco/update with link info.htm

OECD

OECD Economics

Disclaimers:

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without

prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers

and boundaries and to the name of any territory, city or area.

22

OECD (2015), Do Policies that Boost Aggregate Growth Generate EconomicInstability for Individual Households? , OECD Economics Department Policy Note, No. 25, OECD Publishing.

Cournède, B., P. Garda, P. Hoeller and V. Ziemann (2015), “Effects of Pro-Growth Policies on the Economic Stability of Firms, Workers and Households,” OECD Economic Policy Papers, No. 12, OECD Publishing.