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Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Page 1: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

Socially Sustainable Economic Growth

Christopher A Pissarides

London School of Economics

and SPSU Growth Laboratory

24.04.2014

St. Petersburg, SPSU

Page 2: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Themes

• Economic growth can improve the condition of all citizens but can also create conflicts that need to be addressed by policy

• The main benefits of economic growth to the population at large come from well-rewarded employment

• How do labor markets deliver the benefits?

Page 3: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Potential problems with modern labor markets

Page 4: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Non-clearance

• Modern labour markets do not clear fast like output markets

• Adjustments are slow because of time required to acquire new skills, set up new companies, change jobs and especially uncertainties about the future

Page 5: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Equilibrium and growth

• In a dynamic economy equilibrium will be characterised by monopolies, demand and supply mismatches and unemployment

• The fruits from growth may not be shared equally and “fairly” as a result – making growth unsustainable because of social frictions

Page 6: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Implications

• Wages do not reflect only labour productivity but also monopoly power

• Adjustment to shocks is slow and wage inequalities persist

• Growth sectors usually pay more to attract more labour

• Growth is not “inclusive”

Page 7: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Role of policy

• Can reduce equilibrium unemployment by helping workers find jobs faster

• Can help workers achieve good match

• Can speed up the transition to industrial society by removing barriers

• Can increase inclusiveness and reduce inequalities

Page 8: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Energy needs

• A more common reason given for unsustainable growth is the use of non-renewable energy

• I will not discuss this and related reasons but will focus on employment issues and income inequalities

Page 9: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Employment changes during economic growth

Page 10: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Stages of economic growth

• In the first stages of economic development there is reallocation of labour from agriculture to industry and services

• Green revolution releases labor to migrate to industry

• Industrial revolution first attracts and then releases labour as new technology saves labor

Page 11: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Beyond industrialization

• Services at first are low-skill ones, serving the general public

• Eventually sophisticated business (and some personal) services develop, such as finance, accounting, medical care

• But the larger number of employees will always be employed in services that do not require many skills

Page 12: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Inclusiveness

• To avoid exclusion of some workers and unequal distribution of rewards from growth government needs to remove barriers to mobility

• Housing costs: large variations across the country

• Education costs: needs of agriculture, industry and services vary and change all the time

Page 13: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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More mobility barriers

• Information deficiencies about jobs across sectors and locations

• In modern societies structure of welfare benefits can also be a barrier, e.g., entitlements not transferable, housing benefits limited, unemployment benefit low

Page 14: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Role of policy

• Here is where social policy can help most

• Welfare benefits should be national, not local, and be transferable

• These include policies like entitlements to unemployment insurance, housing benefits, child support, low-income support etc.

Page 15: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Housing

• Housing is a major barrier to mobility. In cities with many jobs housing costs are usually much higher

• Government can help with housing policy, such as provision of social housing

• But it needs to be careful to avoid the formation of ghettos

Page 16: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Education policy

• During a transition the first entrants take advantage of the best opportunities offered by the new type of jobs, yielding very high returns to their education

• This introduces large inequalities• Education policy has a very important role

to play in preparing all workers for manufacturing and service jobs

Page 17: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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What type of education?

• Skills required for early transition to industrial society are acquired at elementary and early secondary education

• These should be provided free because of the social benefits

• General type of education gives most flexibility for work in the new economy

Page 18: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Further training

• Beyond the first stage specialisation takes place on the job, after employment commences

• It could be informal learning of how the job is done

• Or formal “apprentice” training, where the school leaver works as an apprentice to a more qualified worker and learns the job

• Government could subsidize apprentice training, as done in Germany

Page 19: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Higher education

• Higher education and research are also important because they drive further growth through new innovation

• In order to achieve high standards in university research universities need to be well funded but be independent

• Government research funding is required to supplement other university income

Page 20: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Funding

• In the USA university budgets are 3.3% of GDP, in Europe only 1.3%

• Americans also give more independence to their universities and public donations are more generous

• Main reason that Europe lags behind the US in top university performance and top innovations

Page 21: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Information policy

• Providing information about new job opportunities is one of the least expensive and most successful policies

• Important to do it for individuals but also nationally for the general public

• Important to engage companies in schools about job needs

Page 22: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Service jobs

• There will always be a large demand for unskilled services, as country develops

• Retailing assistants, domestic services, nursing and social care are the main examples

• But business services also grow, especially in finance

Page 23: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Business services

• Business services require highly trained individuals

• Formal education required at university level

• With economic development, demand for business services likely to expand faster than in proportion to GDP

Page 24: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Policy in the post-industrial society

• In the post-industrial society designing policy gets more difficult

• The reason is that in services inequalities are larger because of globalization and the new technology

Page 25: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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New technology: the office revolution

• Growth of sophisticated services like finance and international property rights bring globalization

• Services technology is “weightless”, in the sense that it can be transferred easily and applied anywhere (e.g., Microsoft software)

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Inequalities in pay

• The result is that a few successful people or companies become very wealthy

• The vast numbers of service employees remain low-paid

• Attempts to increase pay through minimum wages and other restrictions lead to exclusion of lower skills (e.g., unemployment or non-participation)

Page 27: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Inequalities in pay

• Current situation of new technology benefiting only top incomes is unsustainable

• In the US virtually all growth in GDP since the end of the recession went to the top 5% of wage earners

• New technology since 1980s has been shifting the income distribution in favor of higher incomes

Page 28: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Policy response

• Difficult to find good policy response because of political objections and risk of disincentives to new ventures

• In the US there has been virtually no policy response despite well-meaning intentions by Clinton and Obama administrations because of difficulty to pass anything substantial through Congress

Page 29: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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What can be done?I. Markets

• In my view best policy response is to allow the market to function freely, with some restrictions that ensure good work standards

• But very limited or no restrictions on things like hiring and firing, shop opening times and other forms of regulation of output markets, and reasonable minimum wages etc.

Page 30: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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What can be done?II. Low incomes

• Support for low incomes and excluded individuals should be provided through the market

• Such as family income support when the householder is unemployed, subsidized education and health care, subsidized training

• All funded by progressive taxation

Page 31: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Examples

• “Flexicurity” of Scandinavian countries one possible example

• School education of Finland and others who perform highly in PISA tests another

• University structure of US and UK another• Health care and pensions in Netherlands

and Denmark

Page 32: Socially Sustainable Economic Growth Christopher A Pissarides London School of Economics and SPSU Growth Laboratory 24.04.2014 St. Petersburg, SPSU

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Institutional structure

• For this system to work we need a good state system and trust from the public

• Poor institutional structures and over-eager state controls can bring inefficient practices and make matters worse

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Conclusions

• Good social policy and good institutional structures (such as a good legal system, transparent government, one-stop decisions) are needed to ensure that growth is inclusive and so sustainable

• Growth that excludes some individuals and creates inequalities could lead to social conflict