socially sustainable economic growth christopher a pissarides london school of economics and spsu...
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Socially Sustainable Economic Growth
Christopher A Pissarides
London School of Economics
and SPSU Growth Laboratory
24.04.2014
St. Petersburg, SPSU
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Themes
• Economic growth can improve the condition of all citizens but can also create conflicts that need to be addressed by policy
• The main benefits of economic growth to the population at large come from well-rewarded employment
• How do labor markets deliver the benefits?
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Potential problems with modern labor markets
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Non-clearance
• Modern labour markets do not clear fast like output markets
• Adjustments are slow because of time required to acquire new skills, set up new companies, change jobs and especially uncertainties about the future
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Equilibrium and growth
• In a dynamic economy equilibrium will be characterised by monopolies, demand and supply mismatches and unemployment
• The fruits from growth may not be shared equally and “fairly” as a result – making growth unsustainable because of social frictions
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Implications
• Wages do not reflect only labour productivity but also monopoly power
• Adjustment to shocks is slow and wage inequalities persist
• Growth sectors usually pay more to attract more labour
• Growth is not “inclusive”
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Role of policy
• Can reduce equilibrium unemployment by helping workers find jobs faster
• Can help workers achieve good match
• Can speed up the transition to industrial society by removing barriers
• Can increase inclusiveness and reduce inequalities
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Energy needs
• A more common reason given for unsustainable growth is the use of non-renewable energy
• I will not discuss this and related reasons but will focus on employment issues and income inequalities
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Employment changes during economic growth
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Stages of economic growth
• In the first stages of economic development there is reallocation of labour from agriculture to industry and services
• Green revolution releases labor to migrate to industry
• Industrial revolution first attracts and then releases labour as new technology saves labor
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Beyond industrialization
• Services at first are low-skill ones, serving the general public
• Eventually sophisticated business (and some personal) services develop, such as finance, accounting, medical care
• But the larger number of employees will always be employed in services that do not require many skills
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Inclusiveness
• To avoid exclusion of some workers and unequal distribution of rewards from growth government needs to remove barriers to mobility
• Housing costs: large variations across the country
• Education costs: needs of agriculture, industry and services vary and change all the time
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More mobility barriers
• Information deficiencies about jobs across sectors and locations
• In modern societies structure of welfare benefits can also be a barrier, e.g., entitlements not transferable, housing benefits limited, unemployment benefit low
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Role of policy
• Here is where social policy can help most
• Welfare benefits should be national, not local, and be transferable
• These include policies like entitlements to unemployment insurance, housing benefits, child support, low-income support etc.
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Housing
• Housing is a major barrier to mobility. In cities with many jobs housing costs are usually much higher
• Government can help with housing policy, such as provision of social housing
• But it needs to be careful to avoid the formation of ghettos
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Education policy
• During a transition the first entrants take advantage of the best opportunities offered by the new type of jobs, yielding very high returns to their education
• This introduces large inequalities• Education policy has a very important role
to play in preparing all workers for manufacturing and service jobs
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What type of education?
• Skills required for early transition to industrial society are acquired at elementary and early secondary education
• These should be provided free because of the social benefits
• General type of education gives most flexibility for work in the new economy
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Further training
• Beyond the first stage specialisation takes place on the job, after employment commences
• It could be informal learning of how the job is done
• Or formal “apprentice” training, where the school leaver works as an apprentice to a more qualified worker and learns the job
• Government could subsidize apprentice training, as done in Germany
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Higher education
• Higher education and research are also important because they drive further growth through new innovation
• In order to achieve high standards in university research universities need to be well funded but be independent
• Government research funding is required to supplement other university income
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Funding
• In the USA university budgets are 3.3% of GDP, in Europe only 1.3%
• Americans also give more independence to their universities and public donations are more generous
• Main reason that Europe lags behind the US in top university performance and top innovations
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Information policy
• Providing information about new job opportunities is one of the least expensive and most successful policies
• Important to do it for individuals but also nationally for the general public
• Important to engage companies in schools about job needs
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Service jobs
• There will always be a large demand for unskilled services, as country develops
• Retailing assistants, domestic services, nursing and social care are the main examples
• But business services also grow, especially in finance
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Business services
• Business services require highly trained individuals
• Formal education required at university level
• With economic development, demand for business services likely to expand faster than in proportion to GDP
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Policy in the post-industrial society
• In the post-industrial society designing policy gets more difficult
• The reason is that in services inequalities are larger because of globalization and the new technology
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New technology: the office revolution
• Growth of sophisticated services like finance and international property rights bring globalization
• Services technology is “weightless”, in the sense that it can be transferred easily and applied anywhere (e.g., Microsoft software)
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Inequalities in pay
• The result is that a few successful people or companies become very wealthy
• The vast numbers of service employees remain low-paid
• Attempts to increase pay through minimum wages and other restrictions lead to exclusion of lower skills (e.g., unemployment or non-participation)
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Inequalities in pay
• Current situation of new technology benefiting only top incomes is unsustainable
• In the US virtually all growth in GDP since the end of the recession went to the top 5% of wage earners
• New technology since 1980s has been shifting the income distribution in favor of higher incomes
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Policy response
• Difficult to find good policy response because of political objections and risk of disincentives to new ventures
• In the US there has been virtually no policy response despite well-meaning intentions by Clinton and Obama administrations because of difficulty to pass anything substantial through Congress
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What can be done?I. Markets
• In my view best policy response is to allow the market to function freely, with some restrictions that ensure good work standards
• But very limited or no restrictions on things like hiring and firing, shop opening times and other forms of regulation of output markets, and reasonable minimum wages etc.
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What can be done?II. Low incomes
• Support for low incomes and excluded individuals should be provided through the market
• Such as family income support when the householder is unemployed, subsidized education and health care, subsidized training
• All funded by progressive taxation
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Examples
• “Flexicurity” of Scandinavian countries one possible example
• School education of Finland and others who perform highly in PISA tests another
• University structure of US and UK another• Health care and pensions in Netherlands
and Denmark
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Institutional structure
• For this system to work we need a good state system and trust from the public
• Poor institutional structures and over-eager state controls can bring inefficient practices and make matters worse
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Conclusions
• Good social policy and good institutional structures (such as a good legal system, transparent government, one-stop decisions) are needed to ensure that growth is inclusive and so sustainable
• Growth that excludes some individuals and creates inequalities could lead to social conflict