The Slovenian economy is bouncing back — OECD ECOSCOPE

by Rory O’Farrell, Slovenia Desk, OECD Economics Department Slovenia would do well if its economy performed as well as its ski-jumpers. In 2015, Slovenian Peter Prevc became the first ski-jumper in history to jump 250 metres. As impressive has been his ability to land successfully, being among the few jumpers to receive a perfect 20 […]

via The Slovenian economy is bouncing back — OECD ECOSCOPE

Retraining can enable ageing Slovenians to keep pace with new technologies

ECOSCOPE

by Rory O’Farrell, Slovenia Desk, OECD Economics Department

While workers in many OECD countries are worried whether robots will take their jobs, the inhabitants of the Slovenian town of Kočevje are less concerned. In 2016 Japanese robotics firm, Yaskawa, announced plans to produce robots in Kočevje, which could create up to 200 jobs. This is a continuation of a pattern seen since independence whereby Slovenia has continued to shift from traditional manufacturing to business services and high-tech production. However, not all Slovenians have been included in this progress.

Modernisation has mainly been achieved by training young Slovenians to fill new occupations. In contrast, those with obsolete skills tend to retire or become unemployed rather than retrain, leaving Slovenia with persistent long-term unemployment, and amongst the lowest employment rates of older workers in the OECD. An ageing population means this is no longer sustainable, and labour shortages are already emerging. To…

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Ireland has a shortage of men aged 25-34

In many ways the recession hit young men hardest. Employment in the male dominated construction sector collapsed, while employment in the more female public sector was relatively stable. As a result young men were most likely to emigrate.

emigratioj

The result has been the  ratio of men to women (the sex-ratio) for those aged 25-34 fell to the lowest level since records began. If this age group were in a nightclub for every 100 women, there would be only 93 men.

sex rat

While this may not seem dramatic, the figure is even more depressing for single women hoping to be in a relationship with a man*. Though there are no good statistics for the fraction of people that are in a relationship, lets suppose 80% of women aged 25-34 are in a relationship, leaving 20 single women in our nightclub. However, that leaves only 13 single guys (a sex ratio of .65). Therefore Ireland’s plunge in the sex-ratio can have a far larger impact than may first appear.

 

 

*For the sake of simplicity I’m pretending all the gay people are in the George for the night.

The gig economy will not abolish working 9 to 5 — OECD ECOSCOPE

by Rory O’Farrell, Economics, OECD Economics Department Today’s post is also being published by the OECD Insights Blog There is little new about the ‘gig economy’. The word ‘gig’ originates from 1920s jazz musicians who played a small concert or ‘engagement’ at a venue. Dolly Parton may have sung about working 9 to 5, but […]

via The gig economy will not abolish working 9 to 5 — OECD ECOSCOPE

Should any Tom, Dick, or Harry be allowed to call themselves an economist?

Anyone can call themselves a nutritionist. “Dietician” is the legally protected term. “Dietician” is like “dentist”, and “nutritionist” is like “tooth-i-ologist. – Dara Ó Briain.

In a recent initiative the Irish Economic Association have established Guiding Principles for Members. Included is the principle that “Members shall practice within the limits of their competence and only when qualified by education or experience in the specific technical field involved.” This is to be welcomed. However, I believe that economists need to go further.

Anyone can call themselves an economist. Unlike accountants and barristers, there is no commonly accepted Institute of Certified Economists. Newspaper articles sometimes refer to the opinions of an ‘economist’ regardless of their knowledge. In some cases people claim to have a PhD in economics, despite their PhD having been awarded by a faculty other than economics.

I would prefer that economists follow the model of disciplines such as law or accountancy. Although economists often disagree on policy prescriptions, I believe it would be easy to establish a set of criteria in order to become a ‘chartered economist’ or called to the ‘economic’ bar. For example, an economist may not find the framework of perfect competition to be particularly useful, but to be an economist it is necessary to understand this framework, at the very least so as to critique those that use it excessively. An economist should have a grounding in statistics and econometric techniques. An economist should have a knowledge of formal economic models (and be able to criticise those who use them inappropriately). The criteria would need to be updated from time to time.

Similar to chartered accountants and barristers, it would not be necessary to have studied an economics degree to become a certified economist (people may have studied a related subject like business studies, sociology, or even biology). However, it would be necessary to pass a set of exams showing the person understood and could apply the various statistical and economic concepts. There could also be a qualification such as ‘Economic Technician’, similar to accounting technician, for those who use economics regularly, but at a less advanced level. Third level institutions could liaise with an ‘Association of Certified Economists’ to allow their student to sit such exams as part of their studies (similar to accountancy courses).

Does such certification merely serve to stifle debate? I do not think so. For example geographers and town planners have a hugely important role (and in my opinion, a more important role than economists have) in setting housing policy. Economists themselves often comment on areas such as health policy, without medical training. It would allow the public to know whether the opinions they hear come from an economist (and they could decide for themselves whether or not they value the opinions of economists in any case).

If anything, I think it would help prevent broad social issues, such as housing, from being given an excessively narrow economic focus.

 

Does monetary policy increase income and wealth inequality?

ECOSCOPE

by Rory O’Farrell, Łukasz Rawdanowicz, and Kei-Ichiro Inaba,  Macroeconomic Policy Division, OECD Economics Department

As asset prices have risen in recent years, so have concerns that monetary policy, and quantitative easing in particular, has increased inequality. Concern has moved from being the preserve of central bankers and the pages of the financial media to entering popular discourse with calls for “People’s QE” in the United Kingdom. However, recent research shows that not only are the impacts via financial channels of such policies on inequality small, they even have the potential to reduce it.

Monetary policy effects on inequality are ambiguous in theory. A fall in interest rates reduces debt servicing costs and returns on financial assets and may increase, reduce or leave unchanged income inequality. The impact depends on the relative size of variable-rate liabilities and interest-paying assets, or the ease at which rates can be re-negotiated, and on differences…

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Economic reasons for rent regulation

A recent article in the Irish Independent contains the bold assertion that “Economists are virtually unanimous in their assessment of rent control.”

Economists are notorious for seldom agreeing with one another, though most can point out both good and bad examples of rent regulation (with 1950s New York style rent control seen as bad, but the Swiss rental market being viewed as highly efficient).

Most modern European rent regulations allow the landlord and tenant agree a price in a open market, but rent increases are then limited by an index. The index may be the consumer price index, or sometimes an index based on the rents agreed in new tenancies on the open market. Rent renegotiations over and above this are sometimes allowed after a set number of years, or if the landlord has done major renovations that improve the property.

The reason such regulations are prevalent across Europe is due to a market failure in the rental market: the tenant faces the bulk of the switching cost. Tenants face a cost of moving their belongings, having a deposit upfront (while waiting for the return of their current deposit) and search costs (though landlords also face search costs for a new tenant). While a landlord faces a cost of having an unoccupied property (foregone rental income), the cost to a tenant of having nowhere to live is far higher (such as paying for expensive short-term hotel accommodation while searching for a new residence).

This leads to an unbalanced relationship and the landlord can potentially get a sitting tenant (who does not want the costs of moving) to pay over and above what the landlord would get on the open market.

Rent caps or rent ceilings are far less common. These could make economic sense if a landlord has a near monopoly in a certain town. Generally this is unlikely to be the case (and in Dublin there are literally thousands of landlords).

Another market failure includes ‘assymetric information’, the landlord knows more about the flat than the tenant. For example the tenant would not know how expensive it is to warm an apartment. This has recently been overcome by mandatory BER certification.

Although rent regulation does help stop abuses, an increase in supply is necessary for a general fall in rents in Dublin. Though building regulations are essential, some such as a minimum size of 55 square metres for a one bed apartment seem unreasonably strict. (I live in a 50 square metre one bed apartment and visitors often comment on how spacious it is.) There are no information assymetries with regard to the size of apartments.

Finally, regardless of whether or not a consensus exists amongst economists, economists are not the experts on urban planning. While economics does have much to offer in the debate, I think the lead should be left to geographers.

Reducing age based wealth inequality

In a previous blog I gave an example of an “ideal” wealth distribution whereby all household wealth is accumulated over the life-cycle. Even if everyone by age group has the same wealth, there continues to be age based inequality. However, by transferring some wealth to the young it is possible to reduce this aspect of inequality.

In many societies, particularly in the past, wealth transfers to the young are normal as they set out in life. In the past, when wedding parties were not as expensive as now, gifts were given to help a couple set up in their new home. Dowries are one (fairly sexist) example of wealth transfers to the young, and in some European societies the norm was for the groom’s family to give the couple land and a house, while the bride’s provided what went in the house, and the animals. These cultural norms certainly make sense where there are no financial markets where a couple can take out a mortgage to buy a farm.

Today, transfers continue to exist, especially in the form of education. Though not free, Irish education is subsidised by the state, and Irish students typically do not end up with the levels of debt that young graduates start out with in the United States. (The new wealth data can allow us to check this for certain.)

An alternative “ideal”

So, building on the “ideal” example of the previous post, suppose instead that the young are given a transfer of 100 units when they are 22. They save and draw down on their savings in the same pattern as the previous blog. The 100 unit gift is funded by a wealth tax at almost 4%, very close to the rate of return on investment. (An excel sheet outlining this is here.) A wealth tax close to the rate of return can be justified as fair if you think people should only earn an income from their wealth if they do something to make it increase faster than average.

In the scenario of the previous blog the “ideal” was close to reality in terms of inequality by age (though reality has large inequality within age groups). In the scenario with transfers and a wealth tax the distribution by age is far more equal.

ideal wealth with transfers

Wealth inequality by age does not disappear, but is greatly reduced, and the old still draw down the same amount each year as the in the earlier “ideal”. The bottom 20% of society here get almost 13% of household wealth, versus almost zero in reality, and the 17% considered “ideal” in a survey.

Is this fair

Studying economics does not give much insight as to what is fair. Other subjects such as philosophy are better at that.

A more equal wealth distribution may be wanted on fairness grounds. It can be argued that the increase in house prices since the early 1990s was a transfer from the young to the old. However, the old saved during a period when incomes were far lower.

Giving wealth to the young may also help young entrepreneurs have the finance to help them start a business.

Household wealth and the government sector

As mentioned in the previous blog, even in a communist society there would be wealth inequality by age. This is as public assets and liabilities (such as state companies, infrastructure, and the national debt) are not part of “household” wealth, but part of the state sector. This is despite the fact that citizens have a claim and responsibility for such assets and liabilities.

This can be highlighted in the above example. Is giving 100 units, and expecting the beneficiary to pay this back through a wealth tax different to a loan from a bank? Perhaps, having the wealth to buy a house as ones own early in life gives people a greater sense of security. But the two have a hugely different impact on wealth inequality statistics depsite no impact on income flows.

Measures of household wealth are just that. They are not measures of inequality in society. The complexity of society can never be distilled into a single number.

More work is needed

The above example is fairly simplistic, and definitely needs some smoothing off of edges.

No account is made for how people’s behaviour may change. Young people also save for precautionary motives rather than for life-cycle motives because credit markets are imperfect. “Human” capital can be viewed as a form of wealth, but this is not captured in household surveys. A proper analysis would make use of the available microdata, and perhaps make use of a model that shows how behaviour changes over the life-cycle. Such models exist (but to the best of my knowledge have not been used to construct an “ideal” wealth distribution).

However we definitely live in an unequal society, and this can be improved upon. It’s a matter of choice whether we want this or not.

An ‘ideal’ wealth distribution and the life-cycle

People have difficulty understanding distributions. This can be seen in the survey presented in the recent documentary by David McWilliams (which I haven’t seen yet, but am looking forward to watching). In an ‘ideal’ world survey respondents said the top 20% would get slightly more than 30% of net wealth, and the bottom 17%. But in this ‘ideal’ world the bottom 20% are actually richer than those in the middle 60%. Obviously this is impossible.

As pointed out by Seamus Coffey in a blog there is a relationship between aging and wealth as people save for retirement, and then draw down on their savings. It is useful to set out an ‘ideal’ world of saving and drawing down, and then see what wealth distribution emerges. This will show the limits of what can be achieved in a ‘fair’ world.

An “ideal” world

In this “ideal” there is no inheritance, no college debt (so everyone gets the same start), income for those of working age is equal, and everyone of the same age has the same net wealth. Each year people save one unit of their income, and then draw down on this when they retire. They leave no assets behind when they die. (I set working age at 23-67 to allow for new pension rules, and people now stay in education longer, and the rate of return on investment at 4%. Age of death is 78 because it is conveniently 60 years after 18.)

In this world the share of net wealth by age is remarkably similar to what we see in the data.

“Ideal” distribution by age remarkably similar to the data.

I was quite surprised when I saw this, so the Excel file is available here for people to play with (and alter assumptions).

Even in this “ideal” world roughly 45% of wealth would still go to the top 20% (as opposed to roughly one-third as respondents to the survey described as ideal).
However, there still space for a more equal world. Though the top 20% (aged 60-71) would get about 45%, this compares to roughly 72% at present. The top 10% would get a quarter of total wealth rather than half; and the top 5% would get roughly 13% of total wealth, rather than over 35%.

What drives this age based inequality?

Interestingly increasing the amount saved has no impact on measures of wealth inequality. If people double what they save over their life, the pie doubles, but they own the same share at each period. This is relevant as if pensions are provided by the state, and people only save a small amount as a top-up, it has no impact on wealth inequality statistics. (If this seems counter-intuitive, imagine if you saved in old punts rather than Euros; changing the scale doesn’t change dispersion.) Even in a communist country, so long as savings are possible, household wealth is likely to increase with age.

Increasing the rate of return on investment does increase the ratio of wealth of the old versus the young.

Caveats

Obviously this is a simplified view of the world (and a proper paper rather than a blog would go into more detail, and fine-tune the share of total population of each group). There are two main caveats:

  1. Wages tend to increase with age, and people increase their savings over-time. This serves to increase the young/old wealth gap.
  2. Overall wages increase over time. People in older cohorts, such as those born in the 1950s, had far lower wages during their entire working life compared to someone born in the 1980s. This reduces the young/old wealth gap.

Conclusion

Although in this “ideal” world the top 20% still hold a large chunk of net wealth, there is still plenty of space for a more equal distribution. Much of aggregate net wealth inequality is due to inequality within age groups. Those who are starting out in their working lives will likely continue to have very low levels of wealth. It is within the top 20% that the largest extremes exist.

[EDIT: Now online, how transfers to the young (similar to large wedding presents in the past), can help reduce age based wealth inequality.]