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Economic background and perspectives for 2004-2005: The track towards a dynamic economy Economist Conferences Madrid, June 29, 2004 Alternatives for stable economic growth: increasing productivity, greater competitiveness and entrepreneurial innovation Jean-Philippe Cotis OECD Chief Economist 1 Five steps on the track towards a dynamic economy Assembling and interpreting the facts Sound analyses of the facts Drawing out credible implications for policy Winning support for structural reform Implementing reforms 2 Euro area economic performance is diverse, but overall it lacks dynamism… Average growth over the past 10 years Real GDP Real GDP per capita Real GDP per employee Real GDP per hour worked United States 3.3 2.2 1.9 2.0 Selected English-speaking countries 1 3.3 2.5 1.7 1.7 Euro area Euro less Germany Euro 3 2 2.1 2.4 1.8 2.0 1.1 1.0 1.4 1.3 1.7 1.4 1.1 1.7 2.9 2.6 1.0 1.0 3.5 3.0 1.2 1.1 Euro smalls 3 Euro 'catch-up' countries 4 1. Australia, Canada, New Zealand and the United Kingdom. 2. France, Germany and Italy. 3. Austria, Belgium, Finland, Greece, Ireland,, Netherlands, Portugal and Spain. Excludes Austria and Portugal for the Real GDP per hour worked. 4. Greece, Ireland, Portugal and Spain. Excludes Portugal for the Real GDP per hour worked. Source: OECD. 3 …especially in the 3 large economies where real per capita GDP has dropped relative to the U.S. Trend indices, based on 2000 PPPs and 2000 prices 1 Index US GDP per capita = 100 85 Japan Euro-3 (2) United Kingdom 80 75 70 65 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 1. The trend is calculated using a Hodrick-Prescott filter (smoothing parameter set to 100) over a period which includes projections through 2010. 2. Euro-3 refers to Germany, France and Italy. Source: OECD Annual National Accounts. 2000 2003 4 Explaining the differences in GDP per capita: the OECD diagnosis Weak labour utilisation – – – – Hours worked per employee low Less productive workers are priced out of jobs Weak employment rates among older workers Relatively low female labour force participation in some euro area countries Low productivity – Regulatory frameworks limit competition, especially in the nontraded sector – ICT diffusion disappoints in a number of countries 5 Disincentives embedded in old age pension systems discourage older persons from working Implicit tax rates on continued work over next 5 years in current old-age pension systems1 At age 60 In per cent 100 90 80 70 60 50 40 30 20 10 0 l a y nd and tes dom uga land ada tri an a a l l s t n t e a e m u g r a S r r I Ic A C in d Ze Po Ge K w ite d e n N U ite Un ly Ita s e g n d n m in ea ay nd lia ur nc nd CD lan de apa or lgiu pa o a a e rw erla stra E l r n b S J K r o F O Fi Sw N Be itz em ethe Au x w u S N L 1. Single worker with average earnings. 6 Disincentives to older workers are also high in social transfer programmes… Implicit tax rates2 on continued work over next 5 years in current social transfer programmes 1 In per cent At age 55 100 90 80 70 60 50 40 30 20 10 0 la ea w Ne Z nd Ita ly l s a e s a y a y d g n d d a d n n re tate om ECD lan ur tri gium pai tuga and nc an de rwa trali rlan an apa ad an o l s l d o a e n l e e r m n g b J S r K S s e r F O Ir er Ic Au Bel Ca in Fi Sw No Au Po itz em th Ge K ted x e i w d S N Lu Un ite n U 1. Single worker with average earnings. 2. The implicit tax rate on continued work refers to an "early retirement route". The latter is modelled as the unemployment benefits / assistance pathway into retirement with the exception of Ireland, where the modelling refers to the pre-retirement allowance, and Luxembourg, where disability benefits were considered given their widespread incidence among pensioners. In those countries where it is considered that no early retirement scheme can be widely used to withdraw from the labour market before the minimum pensionable age (Australia, Canada, Iceland, Italy, Japan, Korea, New Zealand, Norway, Sweden, Switzerland and United States) the retirement scheme considered in the chart is simply the "regular" old-age pension system. Similarly, at those ages when people are entitled to an old-age pension (e.g in France at 60), the retirement scheme considered in the chart is the "regular" old-age pension system rather than an early retirement scheme. 7 Ic el an N d or w Sw ay Sw ed it en N zerl e w an Ze d al an d U J a ni te pan d St at es K or e U ni Den a te m d K ark in gd o M m ex i Po c o rtu g Ca al n A ada us tra li Ire a la n Fi d N nla Cz ethe nd ec rla h n Re ds pu bl ic Sp ai n Fr an c G e re G ece er m an Tu y rk ey Ita ly P Lu ol xe and m bo u Be rg lg iu Sl m H ov un ak ga Re ry pu bl ic … and bears on the old age employment rate Employment of men and women age 55-64 as a percentage of the population age 55-64, 2002 % of population age 55-64 100 90 80 70 60 50 40 30 20 10 0 Source: OECD. 8 Removing implicit taxes on older workers would raise labour force participation… Potential impact of pension reforms on labour force participation of older workers (projected labour force participation rates of the 55-64 age group in 2025 under different scenarios) 90 85 80 Projection assuming a total suppression of current policy distorsions Baseline projection taking into account the potential impact of recent reforms 75 70 65 60 55 50 45 40 35 Source: OECD. Ita ly G er m an y U Ca ni na te da d K in gd om Sp ai n Po rtu U ga ni l te d S t N ew ates Ze al an d Sw Sw eden itz er la nd Ire la nd Ja pa n N or w ay Ic el an d A us tri Be a l Lu giu m xe m bo ur g Fr an ce A us tra lia K or N e et he a rla nd s Fi nl an d 30 9 … as would lowering work obstacles to females Simulations of policy measures to increase female participation 1 22 20 18 16 14 12 10 8 6 4 2 1. The baseline participation rates are the projected female participation rates for 2025 based on cohort effects and are taken from Burniaux et al. (2003); OECD refers to the unweighted OECD average. Source: OECD estimates. 10 Japan Spain Germany Korea United States Netherlands Ireland France Portugal New Zealand Belgium OECD United Kingdom Czech Republic Switzerland Australia Austria Canada Mexico Denmark Norway Turkey Sweden Finland 0 Euro area labour productivity has converged closer to US levels, but not output per capita… Index 225 USA: real business GDP per capita, index 1970=100 200 USA: real business GDP per hours worked, index 1970=100 Euro-3: real business GDP per capita (1) 175 Euro-3 : real business GDP per hours worked (1) 150 125 100 75 20 03 20 00 19 97 19 94 19 91 19 88 19 85 19 82 19 79 19 76 19 73 19 70 50 1. France, Germany and Italy. Data are indexed by the difference between US real business GDP per capita and the Euro-3 real business per capita in 1970. Source: OECD. 11 …but the interpretation of labour productivity requires care Percentage gap with respect to the United States level, 2002, 1995 PPP Labour resource utilisation gap with US 1 10 Correlation coefficient = -0.9 Japan 0 Canada Australia -10 United Kingdom -20 European Union Germany France -30 Italy -40 -30 -25 -20 -15 -10 -5 0 5 10 Labour productivity gap with US 2 1. Labour resource utilisation gap is measured as trend total number of hours worked divided by population. 2. Labour productivity gap is measured as trend GDP per hour worked. Source: OECD. 12 Barriers to entrepreneurship in euro area countries are high 1 6 Barriers to competition 5 Regulatory and administrative opacity Administrative burdens on startups 4 3 2 1 1. The scale of indicators is 0-6, from least to most restrictive. Source: Nicoletti, et all (1999), "Summary indicators of product market regulation with an extension to employment protection legislation," OECD Economic Working Papers no. 226. 13 Italy France Belgium Japan Switzerland Germany Finland Sweden Spain Greece Austria Portugal Netherlands Norway Denmark United States New Zealand Ireland Australia Canada United Kingdom 0 The policy agenda is broad Good macroeconomic policies are essential Strengthen incentives to work Stemming the flow into early retirement Increase labour force skills Nurturing an entrepreneurial climate Enhancing the creation and diffusion of technological know-how Improving the functioning of financial markets 14 Implementing reforms: what role for the OECD? Progress is being made, but it is slow and uneven The importance of empirical analyses Identifying priorities Strategies for winning broad support for change A ‘piecemeal’ or ‘package’ approach to reform? 15 SPARES 16 Real business sector GDP per employee and per hour worked in the large euro area countries Euro-3 1 Index 1970=100 240 Real business GDP per employee in the business sector Real business GDP per hour worked 220 200 180 160 140 120 100 80 1970 1973 1976 1979 1. France, Germany and Italy. 1982 1985 1988 1991 1994 1997 2000 2003 17 Euro area labour productivity has converged closer to US levels, but not output per capita… Index 225 USA - real business GDP per capita, 1970=100 200 USA - real business GDP per hours worked, 1970=100 Euro area: real business GDP per capita (1) 175 Euro area : real business GDP per hours worked (1) 150 125 100 75 1. Data are indexed by the difference between US real business GDP per capita and the euro area real business per capita in 1970. Source: OECD. 18 20 03 20 00 19 97 19 94 19 91 19 88 19 85 19 82 19 79 19 76 19 73 19 70 50 … and bears on the old age employment rate Employment rates by age and gender, 2002 % of working age population 90 Old 55-64 80 Young 15-24 Women 25-54 70 Men 25-54 60 50 40 30 20 10 A PO L TU R IT L X K O R FR A M EX BE L ES P SV K G RC H U N LU IR E N O R D N K SW E N LD G BR N ZL U SA CA N A U S JP N PR T FI N CZ E D EU CH IS L 0 Source: OECD. 19