Socially Sustainable Economic Growth

Christopher A Pissarides

London School of Economicsand SPSU Growth Laboratory

24.04.2014St. 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