Productivity and long term growth

Policy challenges for the next 50 years interactive charts

 

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Global integration is likely to continue, but at a slower pace. Still, increases in trade intensity will be significant, and by 2060 euro area exports to Asia and emerging economies may be equivalent to 15% of GDP and similar in size to trade within the euro zone.

Addressing the trends behind the faltering growth performance will require policy changes.

  1. Implement further multilateral trade and investment agreements and pursue migration policies aimed at filling gaps in skills and labour participation, which will have to be supported by policies that favour entrepreneurial activity and worker mobility (e.g. pension portability).
  2. Enact social insurance reforms to maintain labour supply in the face of rising longevity and an ageing workforce, while making retirement systems more resilient to productivity and demographic shocks.
  3. Ensure that strong demand for education and skills, stimulated by rising skill premiums and prolonged working lives, can be translated into work-related skills that match the demand for jobs.
  4. Ensure that product and labour market settings make it possible for young and high-productive firms to expand fast and encourage firms to innovate, without unduly favouring incumbents (e.g. in the area of R&D subsidies and IPR).
  5. Prevent environmental damages from slowing down growth by taking early action to avoid locking in emission-intensive infrastructure and promote a shift toward a cleaner development path. This can be achieved through a policy mix of appropriate pricing of carbon and reform of fossil-fuel subsidies, complemented by more targeted measures.

The global economic balance will continue to shift towards the current non-OECD area, which will have an economic structure and exports increasingly similar to those of the OECD.

With technical progress raising the global demand for high-skilled workers, by 2060 average market earnings inequality (before tax and transfers) in the OECD area will reach the level of today’s most unequal OECD countries.

Despite falling absolute global poverty and shrinking income gaps across countries, the growing importance of skill-biased technological progress for growth and rising demand for higher skills will lead to continued polarisation of the wage distribution within each country (Figure below). With unchanged redistributive policies, the average OECD country will face an increase in (pre-tax) earnings inequality by 30% in 2060, facing almost the same level of inequality as is seen in the United States today.2 Significant increases in inequality will also materialise in other G20 economies. In turn, rising inequalities may backlash on growth, notably if they reduce economic opportunities available to low-income talented individuals.   

 

 

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