An anatomy of inclusive growth in Europe* Zsolt Darvas Bruegel and Corvinus University of Budapest * Based on a joint work with Guntram B.Wolff Inclusive growth: global and European lessons for Spain 31 May 2017, Madrid
What is inclusive growth? OECD (2014) defines inclusive growth as: economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society Measurement of inclusive growth goes beyond onedimensional GDP growth Jobs, skills, education, health, the environment and active participation in the economy and society also matter Inequality of outcomes (such as income, wealth, health and education) and opportunities (access to education, jobs, finance and the judicial system) are central to understanding how inclusive growth is 2
Outline 1. Why does inclusive growth matter? 2. Does technological progress drive income inequality? 3. How inclusive is the EU s economic development? 4. National policies for fostering inclusive growth 3
Key message 1: The literature about the impact of income inequality on long-term growth is mixed 4
Inequality and growth Greater inequality could reduce economic growth: by reducing the capacity of low-income households to invest in education, lowering economic growth under-investment in human capital by poorer segments of society might reduce social mobility and adequate allocation of talent across occupations greater inequality might lead to political instability and social unrest Greater inequality could increase growth: if it provides incentives to work harder and take risks in order to capitalise on high rates of return high return for education might encourage more people to study higher inequality could foster aggregate savings and capital accumulation, because the rich consume relatively less The empirical evidence about the impact of inequality on growth is inconclusive 5
Key message 2: Inequality was a determinant of unsustainable pre-2008 booms in the United States and several European countries 6
Change in houshold loans/gdp, 2002-2007, (percentage point) EU countries: inequality, pre-crisis borrowing, and post-crisis contraction Change in private consumption, 2008-2013, (constant prices, %) 50 40 30 20 10 0 DK SI SE CY NL BG FI HU CZ SK FR BE AT -10 DE Gini-coefficient (after transfers and taxes), average 2002-2007 Pre crisis: High inequality higher borrowing IE PL ES RO GR LT IT EE LV PT GB 22 24 26 28 30 32 34 36 10 PL SE 5 AT BE DE FR FI 0 GB CZ -10 0 10 SK 20 30 DK 40 50-5 BG EE SI NL IE IT RO LV -10 LT PT ES HU -15 CY -20-25 GR -30 Change in houshold loans/gdp, 2002-2007, (percentage point) Higher pre-crisis borrowing deeper contraction in 2008-13 7
Youth unemployment rate Spanish regions: inequality vs unemployment, 2010 60 Ceuta 55 Canary Islands Melilla 50 45 40 35 30 Valencia Balearic Islands Catalonia La Rioja Murcia Asturias Madrid Cantabria Galicia Castile and Navarra Aragon León Basque Country Andalusia Extremadura Castile-La Mancha Higher inequality is associated with higher youth unemployment 25 27 30 33 36 39 Gini coefficient of income inequality 8
Key message 3: Higher income inequality is associated with less intergenerational (or social) mobility 9
Generational earnings elasticity (less mobility ) The Great Gatsby Curve: more inequality is associated with less mobility across generations 0.5 0.4 0.3 0.2 Sweden Finland Germany Norway Denmark France Italy Japan United Kingdom United States New Zealand Canada Australia High inequality: the children of poor families tend to stay poor, while the children of rich families tend to stay rich 0.1 20 25 30 35 Income Inequality (more inequality ) Source: Corak (2013), Figure 1. 10
Key message 4: Inequality might foster protest votes 11
Inequality and protest votes in referenda and elections Our econometric estimates confirm that In the United Kingdom s Brexit referendum on 23 June 2016 In the United States presidential elections on 8 November 2016 greater inequality supported Brexit/Trump votes beyond socio-economic and geographic factors, such as: Age Level of education Income Unemployment Race Share of immigrants in resident population Geography (in the UK: London, Scotland, Northern Ireland) 12
Key message 5: Technological development was not the main reason behind increasing income inequalities 13
Technological change and skill premium Skill-biased technical change: technical changes shifts production to technology that favours skilled over unskilled workers By increasing the productivity of skilled workers, and thereby the demand for such workers, skill-biased technical change may explain rising wage inequality Literature dominated by the analysis of the US We analyse cross-country developments and do not find support of this hypothesis 14
Employment by educational attainment in the EU, 1992-2015 (millions of jobs) Source: Eurostat Employment by sex, occupation and educational attainment level (1000) [lfsa_egised] dataset. Note: the solid line shows the aggregate of EU15 countries (EU members before 2004), which is available from 1992. The 15 samecolour dashed line indicates the aggregate for 27 EU member states, which is available from 2000.
Employment by educational attainment in the US, 1992-2015 (millions of jobs) Source: US Census Bureau. 16
Technological change and skill premium Percent change in wage per hour worked from 1995-2009 (deflated by the consumer price index) Source: World input output database, July 2014 release; Note: definition of skills follows 1997 ISCED level, where LOW encompasses primary education or first stage of basic education and lower secondary or second stage of basic education; MEDIUM is (Upper) secondary education and post-secondary non-tertiary education; HIGH is first stage of tertiary education and second stage 17 of tertiary education.
Percent change in the skill premium Technological change and skill premium The average rate of unemployment of those with tertiary education and change in skill premium, 1998-2009 15 10 5 0-5 -10-15 United States Austria Ireland Netherlands Luxembourg Japan Denmark Belgium Korea Sweden United Kingdom Finland Germany Portugal France Greece Supply-demand conditions were not the key determinants of the major skill premium increase in the US Spain -20-25 Italy 2 3 4 5 6 7 8 Average rate of unemployment of the tertiary educated 18
Tertiary education premium Technological change and skill premium Share of tertiary-educated workers and their relative earnings, 2013 210 200 190 180 170 160 150 140 130 120 Turkey Czech Republic Italy Mexico Slovakia Portugal Hungary Japan Slovenia Germany Poland Netherlands Luxemboug Switzerland France Austria Spain United Kingdom Greece Finland Korea Belgium New Zealand Canada Estonia Australia Denmark Ireland Norway Sweden United States 15 20 25 30 35 40 45 50 55 Population with tertiary education US tertiary educated workers enjoy unusually high premium 19
Industries with the most top 1% earners United States European Union Source: Rothwell (2015). Source: Denk (2015) 20
Technological change and skill premium To sum up: - Technological change tends to favour those with greater skills; - However, it is hard to see in the data how it has contributed to rising skill premia and consequent income inequalities; - Most likely, other factors were more important - Redistribution, education policies, regulation 21
Key message 6: Inequality and poverty in Europe are rather low, though diverse across member states Unemployment is a problem 22
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Income inequality: the EU as a whole vs the US 55 50 45 40 35 30 Market: before taxes and social transfers Net: after taxes and social transfers Market, US Net, US Market, EU28 Net, EU28 Similar market inequality, while net inequality in the EU fell in 1995-2008 23
Poverty and income inequality around the world No. countries Poverty (%) Income inequality Unemploymen t rate (%) EU EU15 (ex. south & UK) 10 0.5 27 7.8 Southern EU 4 2.3 34 19.4 Non -EU United Kingdom 1 0.5 35 6.2 Baltics 3 1.5 34 9.6 Other newer EU members 10 1.7 30 10.3 United States 1 1.3 37 6.1 Non-EU advanced (ex. US) 7 0.3 29 4.8 China 1 19.3 53 4.1 Asia (ex. China & CIS) 19 23.6 40 4.5 Latin America 19 12.1 44 6.9 Africa 36 72.5 44 12.0 CIS (former USSR) 10 19.3 35 6.9 Source: Bruegel based on World Bank World Development indicators (poverty), the Standardised World Income Inequality Dataset (income inequality), International Monetary Fund World Economic Outlook (unemployment rate). Note: Poverty refers to the percent of population living below $2.50 a day. Income inequality refers to the Gini coefficient after taxes and transfers. For each country and indicator, the latest available data is used, which is typically available for 2012 or 2013 for poverty 24 and income inequality and 2015 for the unemployment rate.
Income inequality in EU countries, average 2000-2014 Large diversity 25
Key message 7: Polarisation between the south and the north of the EU has increased, as well as between the young and the old 26
Widening divides within the EU Between north and south of EU Between old and young Between high-educated and low-educated 27
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Poverty in the EU 15% Severe material deprivation rate EU27, by educational attainment EU27, different age groups 13% 10% 5% 0% 11% 9% 7% 5% Less than primary, primary and lower secondary Upper secondary and post-secondary non-tertiary Tertiary Children Working Age Elderly Poverty is much more widespread among low-educated people and they suffered more during the crisis. 28 The gap between young and old widened during the crisis.
Key message 8: National policies for fostering social mobility and fairness are crucial EU can do little 29
National policies for fostering inclusive growth Tax policy, social policy, labour laws or education policies are almost exclusively national competences in the EU National policies: 1. Recent economic policy decisions in the EU and in particular, fiscal adjustment strategies during the recent crisis (see table next slide) 2. Addressing unemployment 3. Adequacy of national policies for fostering social mobility (e.g. education: early childhood education, tertiary education, challenges by robotisation 4. Extent of redistribution and progressiveness of tax systems 5. Protection of different sectors 6. Efficiency of national redistribution systems (see chart) 30
Fiscal consolidation: Old-age spending increased or preserved, education and family spending cut General government expenditure by function Share EU24 Percent change in current prices, 2009-2012 EU24 Greece, Ireland, Portugal Italy, Spain 9 other EU15 Baltics 3 7 other NMS Total general government expenditures 100 4-12 1 6-3 7 Interest payments 5 23 14 32 19 164 22 Broad services 17-2 -12-11 2-15 -1 Economic affairs 9-5 -45 5-6 -20-4 Environment protection 2-5 -26-8 -4-6 21 Health, recreation 17 4-20 -7 8-6 12 Education 11 2-14 -10 5-7 8 Old age 20 10 0 8 10 15 13 Family and children 4 0-19 -10 3-14 1 Housing 1 12-30 6 13 23 20 Unemployment 4 0 11 14-5 13-11 Sickness and disability 6 7-7 -1 9-5 12 Other social protection 5 7-11 5 9 26 8 Memorandum: inflation 8 6 8 7 12 10 Source: Bruegel using Eurostat s General government expenditure by function (COFOG) database. Note: Belgium, Croatia, Slovakia and Romania are not included because of lack of data; we report data for the aggregate of the remaining 24 countries of the EU (EU24). For the Baltic States, the 2008-12 period is shown, because fiscal consolidation started earlier in these countries. The aggregates for countries with different currencies were calculated using constant exchange rates (the average of 2009-13) and therefore exchange rate fluctuations do not affect the values shown. Broad services include: general public services except interest 31 payments, defence, public order and safety and community amenities.
Reduction in market income inequality (in % ) Efficiency of social redistribution system Social expenditure vs income inequality reduction, average for 2000-14 50 45 40 35 30 LV EE IE LT UK ES SE DK HU CZ SI SK PL PT FI NL GR LU IT BE DE FR AT 25 RO BG 20 10 15 20 25 Social expenditure in % of GDP Without extra money, Spain could achieve better social outcomes by more efficient social spending. 32