Structural reforms to help address the crisis of life

The cost of the crisis of life is very clear in the latest forecast released by the OECD. This column identifies structural reforms, including increasing kind family benefits and reducing labor-income tax wages, which increase the disposable income of a family that is more consistent than GDP in the long run. In response to the cost of unraveling the crisis of life, governments should consider implementing these reforms to supplement financial assistance to vulnerable families.

The cost of the crisis of life is very clear in the latest forecast published by OECD (OECD 2022). The expected GDP growth rate this year is positive for each OECD country, but the real household disposable income growth rate is consistently low and negative for most of them (Figure 1). Moreover, the extent of this disparity has not been felt in some countries since at least the 1970s, and it is even more important in terms of the long-standing argument that measuring income based on disposable household income provides a higher measure of well-being in GDP. For example, adjustable household disposable income (AHDI)¹ OECD is used as an alternative measure of GDP in flagship publications, How is life: measuring wellnessOECD is a component of the Better Life Index, and is more consistent with the recommendations of the Stiglitz-Sen-Fitusi Commission for measuring economic performance and social progress to focus on household income and consumption rather than output (Stiglitz et al. 2009).

Figure 1 Comparing GDP and household disposable income estimates

Annual growth (%) in 2022

Note:: Chart compares recent OECD estimates of real GDP growth in 2022 and disposable income of real households. Data on actual household disposable income is easily available for OECD countries only.
Formula: OECD Economic Outlook (June 2022).

In response to the crisis of life, governments are providing temporary, timely, and well-targeted financial assistance to vulnerable families (Adam et al. 2022). Such policies may contradict structural reform measures, which are generally more sustainable in nature and usually take many years to increase the supply-side potential of the economy. However, our recent study considers the differential effect of a range of structural reforms on AHDI compared to GDP (Botev et al. 2022). Our main searches can be summarized as follows:

• The increase in real energy prices experienced by consumers and industry creates a clear wedge between real GDP and real AHDI: for a typical OECD country, every 10% real energy price increase reduces AHDI by about 2% of GDP.
• Some structural reform policies – inherent family benefits, family cash benefits, and a reduction in income tax wages for workers with a family – have a magnifying effect on AHDI, so that after policy reform, long-term percentage changes in AHDI. Larger than GDP. All of these policies work through employment growth and partly increase AHDI from GDP because they increase income for families already employed. This means they have a faster impact on AHDI than employment.
• Another group of structural policies, typically where transmission mechanisms rely primarily on productivity and capital intensity, has a weaker long-term effect on AHDI than GDP. Thus, corporate tax and policy cuts that stimulate private business R&D still increase ADHI, the (percentage) impact is estimated to be less than half of their long-term impact on GDP. Similarly, policies that improve trade openness or competitiveness in the commodity market increase AHDI, but the percentage of AHDI decreases by more than one-third of the profit in GDP. Other policies that could weaken labor bargaining power, such as relaxing employment protection legislation, have a weaker long-term effect on AHDI than GDP, and where the reduction in additional coverage of the joint wage agreement is expected to be positively prolonged. – Impact on employment and GDP, it is estimated to reduce ADHI.
• The long-term effects (in percentage terms) of AHDI for other structural policies differ marginally from GDP, although sometimes there are significant symptom differences between short- and long-term effects. For example, while reducing unemployment benefit replacement rates or minimum wages can increase employment, GDP, and ADHI in the long run, they significantly reduce ADHI in the short term.

In addressing the crisis of life, these results provide a particularly strong case for increasing support for early childhood education and child care, with OECD benefiting more than 70% of families across the country. Such policies encourage long-term employment, especially for women, and have a rapid and large impact on household disposable income. Moreover, even before the current episode, less than 22 OECD countries, including all G7 countries (Botev et al. 2022, OECD 2021) were identified among the top structural reform priorities. Government spending on family benefits varies widely across OECD countries (Figure 2), with Nordic countries spending more than twice as much as OECD as part of GDP. While revenue for such additional spending may decline at higher primary levels, it still leaves the OECD ample opportunity to increase spending in the majority of countries.

Figure 2 Government expenditure for family benefits

Percentage of GDP, available in 2019 or next year

Formula: OECD Social Expenditure Database

Finally, on the basis of equity (Corneliusen et al. 2018, Felfe and Lalive 2018, Hermes et al. 2021) and due to the additional supply-like benefits through long-term improvement, there are additional reasons for promoting good quality child care. In human capital and total factor productivity (Egert et al. 2022).

References

Adam, S, C Emmerson, H Karjalainen, P Johnson and R Joyce (2022), “IFS Response to Government Cost of Living Support Packages”, Institute for Fiscal Studies.

Botev, J, B Égert and D Turner (2022), “The Impact of Structural Reform: Do They Distinguish between GDP and Disposable Income of Consistent Households?”, OECD Economics Working Paper No. 1718.

Cornelissen, T, C Dustmann, A Raute and U Schönberg (2018), “Universal Child Care: Possibility to Equalize Playground Between Rich and Poor”, VoxEU.org, 7 June.

Égert, B., C de la Maisonneuve and D Turner (2022), “A New Overall Measure of Human Capital: The Linking of Education Policy to Productivity through PISA and PIAAC Scores”, VoxEU.org, 28 April.

Felfe, C and R Lalive (2018), “The Effect of Leveling on Good Quality Early Child Care”, VoxEU.org, 20 May.

Hermes, H., P. Lergetporer, F. Peter and S Wiederhold (2021), “Socio-Economic Gaps in Child Care Enrollment: The Role of Behavioral Barriers”, VoxEU.org, 7 December.

OECD (2020), How is life going? 2020: Measuring Wellness, OECD Publishing, Paris.

OECD (2021), Going for growthOECD Publishing, Paris.

OECD (2022), OECD Economic Outlook 2022 (1), OECD Publishing, Paris.

Stiglitz, J. A. Sen and J. P. Futsi (2009), Measures of economic performance and social progress, Reported by the Commission for Measuring Economic Performance and Social Progress.

Endnote

1 The adjustment of ‘adjusted’ family disposable income reflects an alleged value from government services such as education and health which provides a good basis for comparing performance across the country.