Politics & Policies

Structural Reform in OECD – Labour market reforms with active labour market policies would boost living standards by 21⁄2 per cent

This paper updates the long-term scenarios to 2060 last published in July 2018, with a special focus on fiscal sustainability and risks. In a baseline economic and fiscal scenario, trend real GDP growth for the OECD + G20 area declines from around 3% post-COVID to 1½ per cent in 2060, mainly due to a deceleration of large emerging-market economies. Meanwhile, secular trends such as population ageing and the rising relative price of services will keep adding pressure on government budgets. Without policy changes, maintaining current public service standards and benefits while keeping public debt ratios stable at current levels would increase fiscal pressure in the median OECD country by nearly 8 percentage points of GDP between 2021 and 2060, and much more in some countries. Policy scenarios show that reforms to labour market and retirement policies could help boost living standards and alleviate future fiscal pressures. An ambitious reform package combining labour market reforms to raise employment rates with reforms to eliminate early retirement pathways and keep effective retirement ages rising by two thirds of future gains in life expectancy could halve the projected increase in fiscal pressure in the median country, even after taking into account future spending pressures associated with ageing.

Reaching for best practices on labour market policies

A scenario illustrates potential employment gains if OECD countries would close, by 2030, half of current gaps on a number of labour market policy indicators relative to the five best- performing countries. Only half of the gaps are assumed to close in recognition of the difficulty of implementing the implied structural reforms. The assessment uses the impacts of labour market reforms estimated by Gal and Theising (2015[6]) and Égert and Gal (2017[7]).

For the median country, the reform package implies the following changes over the 2023-to-2030 period: spending on active labour market policies (ALMP) per unemployed worker rises by 10 percentage points of GDP per capita, public spending on family benefits in kind rises by 0.6 percentage points of GDP, maternity leave increases by 12 weeks, and tax wedges for both single earners and couples decline by about 9 percentage points of labour costs. Specific reform magnitudes depend, for each country and indicator, on gaps relative to best practices according to the latest available data.

The OECD-wide reform effort boosts trend real GDP per capita growth by 1⁄2 percentage point at the peak toward the end of the reform implementation period (Figure 8, Panel A). The rapidity with which employment reacts implies some temporary reduction in the amount of capital available per worker, hence the slight negative growth contribution from capital intensity initially. This spurs investment to rise and eventually capital intensity also contributes positively to growth. The labour market reforms considered are assumed not to impact trend labour efficiency. OECD average living standards are about 21⁄2 per cent higher by the time the reforms are fully implemented in 2030 and nearly 7% higher by 2060 (Figure 8, Panel B). These positive outcomes are driven in large part by gains in female employment. Besides promoting the integration of women in the labour market, better family benefits, longer maternity leaves and lower tax wedges also promote employment among the lower-income segments of the population (OECD, 2017[8]).

By 2060, cumulative improvements in living standards relative to the baseline scenario are as much as 9-10% in countries that are currently furthest from best practices on the set of labour market policies considered here (Figure 9). It should, however, be noted that many countries, especially in Europe, have implemented labour market reforms in recent years. Because the standard labour market indicators used here are only available with a few years’ lag, they may not reflect the most recent reforms.

Chosen excerpts by Job Market Monitor. Read the whole story @  The long game: Fiscal outlooks to 2060 underline need for structural reform | OECD Economic Policy Papers | OECD iLibrary


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