Do pro growth policies generate economic instability for households 2015

1. 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

2. Why does household-level economic
instability, measured by microeconomic
volatility, matter?

3. 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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.
AUS
AUT
BEL
CAN
CHE
CZE
DEU
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
Microeconomicvolatility,%
Life satisfaction (0 to 10)

4. 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 the
Economic 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
SVN
SWE
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
Microeconomicvolatility,%
Income inequality, Gini (0 to 1)

5. 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.

6. 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
Microeconomicvolatility,%
Macroeconomic volatility, %
Line y=x
Source: 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 1201, OECD.

7. Many steps lead from individual labour earnings
to household disposable income
Individual
labour
income
Household
labour
income
Household
market
income
Household
disposable
income
Capital income
Family 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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

8. 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
GRC
LUX
CZE
ITA
HUN
SVK
PRT
BEL
SVN
DEU
EST
CHE
AUT
FRA
POL
NLD
GBR
IRL
SWE
FIN
NOR
ESP
ISL
AUS
DNK
2007 1995
Source: 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 1201, OECD.

9. 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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.
AUS
AUT
BEL
CAN
CHE
CZE
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, %
Annualhoursworkedvolatility,%

10. What are the impacts of economic
policies on microeconomic instability?

11. 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 and
investment (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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

12. 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

13. 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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

14. 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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

15. 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
SWE
SVN
NOR
DNK
NLD
FIN
BEL
DEU
CAN
FRA
CHE
CZE
LUX
AUT
HUN
IRL
PRT
AUS
SVK
GBR
GRC
EST
ITA
ESP
USA
KOR
POL
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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

16. …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
AUS
AUT
BEL
CAN
CHE
CZE
DEU
DNK
ESP
EST
FIN
FRA
GBR
GRC
HUN
IRL
ITA
KOR
LUX
NLD
NOR
POL
PRT
SVK
SVN
SWE
USA
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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

17. Tax-and-benefit systems differ between
high and low attenuation countries
-1.5
-1
-0.5
0
0.5
1
1.5
Total taxes/GDP
Personal income tax
Property tax
Social contributions
Consumption taxes
Total social
expenditure/GDP
ALMP
Unemployment benefits
Family cash transfers
Tax progressivity
Unemployment benefit
progressivity
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 the
Economic Stability of Firms, Workers and Households”, OECD Economic Policy Papers, No 1201, OECD.

18. Do pro-growth reforms improve or harm
economic stability for households?

19. 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

20. 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

21. 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

22. More Information…
http://www.oecd.org/eco/update with link info.htm
OECD
OECD Economics
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22
OECD (2015), Do Policies that Boost Aggregate Growth Generate Economic
Instability 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.