New Approaches to Economic Challenges: Policy Trade-Offs and Complementarities


For reasons related to measurability, comparability and tractability, economic growth has often been used as a proxy for living standards or wellbeing and thus the main objective for economic policy. Evidence suggests, however, that while economic growth is a necessary condition for improvements in wellbeing, it is not sufficient. Furthermore, policies aimed at increasing economic growth can have a mixed effect on the various components of wellbeing. The multi-dimensional nature of wellbeing, therefore, leads to numerous potential trade-offs and complementarities when different policy levers and instruments are adopted to maximise one or more dimensions of wellbeing. These trade-offs and complementarities have become even more relevant since the crisis hit, as they not only confirmed that previous analytical frameworks were unsustainable, but because they confirmed that “business as usual” is not an option in an increasingly interconnected economy.

The proposed work under this category will:

  • Examine the impact of various policies on wellbeing and the economy.
  • Review conceptually and analytically the complex policy trade-offs and interactions in dealing with key dimensions of wellbeing, from income growth, to income inequality, to environment and economic stability, which have gained centre stage in the policy agenda of governments in OECD and, increasingly, in emerging economies.
  • Highlight the need to work towards greener and more inclusive growth, taking into account the multidimensionality of the challenge, the drivers of the distribution of non-monetary dimensions of progress, and the link between policy instruments and the monetary and non-monetary dimensions of wellbeing. In this context, a working definition of inclusive growth could be a rise in multi-dimensional wellbeing (including environment, health, etc.) that is driven both by average increases in welfare and by a rise in equity. Depending on the outcomes of the projects in this stream, further work could examine other trade-offs and synergies among the dimensions of wellbeing.
  • Provide a longer-term perspective on how global trends may evolve and the challenges they may pose to policy objectives. In this context, structural policies can affect the direction and extent of these global trends. Indeed, one aim will be to illustrate how different evolutions of the global trends will affect the trade-offs between policy objectives. 


Linking policy drivers to wellbeing outcomes

B1   New approaches to analysing multi-dimensional wellbeing: trade-offs and synergies
B2   Measuring and assessing job quality
B3   Assessing the effects of distribution of skills and key related institutional variables on multi-dimensional wellbeing outcomes


Inequality and economic growth

B4   Do policies that increase GDP per capita also increase median income?
B5   Assessing the transitional costs and distributional consequences of structural reforms
B6   Closing the loop: how inequality affects economic growth and social cohesion?
B7   Analysing growth and equality trade-offs in taxation
B8   Trade-offs and synergies between globalisation, innovation and inequality


Environment, economic growth and inequality

B9   Cost of Inaction and Resource Scarcity: Consequences for Long-term Economic Growth / Benefits of Action
B10   Environmental policies and economic performance
B11   Trade-offs and synergies between environment and inequality


Economic growth and stability

B12   Increasing the resilience of economies to exogenous shocks


Long-term trends and policy trade-offs

B13   OECD@100: global trends and policy challenges
B14   Long-term scenarios for food and agriculture
B15   Ensuring productivity growth and innovation in the long run


 View the other pillars of the New Approaches to Economic Challenges:


Description of projects


New approaches to analysing multi-dimensional wellbeing: trade-offs and synergies


One of the main lessons from the crisis is that it partly reflected a reductionist view about the ultimate ends of policies (i.e. higher economic growth), often seen as a proxy for wellbeing. Ideally policies should be examined on the way in which they actually enhance (or detract from) wellbeing (distribution as well as average performance). This is important for a number of reasons. For example, the lack of improvement in wellbeing outcomes for the median person may have contributed to the crisis through higher consumption, higher debt, vulnerability and financial instability. Similarly, policies that deliver growth but do not improve the wellbeing of the majority of members in a society will not be sustainable politically over the long term. Ultimately, economic growth is desirable as a means to wellbeing rather than as an end in itself.

The proposed project will help move the analysis of wellbeing to the centre of policy analysis, by allowing the quantification of trade-offs between different wellbeing dimensions. At a later stage, it will enable analysis to identify and quantify the impact of different policies on wellbeing. The core of this project will be to estimate wellbeing functions for different dimensions of the Better Life Initiative. Each outcome area will therefore be modelled as a function of the other outcomes and of important contextual (and proxy) variables (such as the rate of GDP growth). The analysis will be conducted at the level of both aggregate wellbeing outcomes for different countries (cross-sectional and over-time) and for measures of inequalities in the distribution of these outcomes across the population. Depending on data availability, it will also be extended to an analysis of outcomes at the individual level. As part of this project, we will also examine the pioneering experiences of a few OECD countries in using multidimensional approaches to wellbeing in policy making. 

Related documentation:




Measuring and assessing job quality


The crisis has put the spotlight on the need to kick-start job creation. But does it matter what sort of jobs these are? And is there a trade-off between policy measures to encourage greater job creation and the quality of these jobs in terms of pay, working conditions, job security, informality, etc.?  Are youth likely to be most at risk in cycling between a range of poor quality jobs interspersed with unemployment? These are important questions which not only concern individual well-being but also the prospect for economic growth and the strength of public support for reforms in both OECD and emerging economies. If these reforms are perceived to lead to little gains in terms of creating good quality jobs and at the cost of increasing greater job insecurity and labour market duality, they may encounter strong public opposition and weakened social cohesion.

The aim of this project is to bring job quality to the forefront of the policy debate on how to promote inclusive growth, by arguing that labour market performance should be assessed in terms of the increase in both the number and quality of job opportunities, i.e. policies should seek to promote more and better jobs. Another innovative component of the project will be its focus on job quality in emerging economies especially on the high incidence of informal work. The project will adopt several different and new descriptive and analytical approaches and will document the key dimensions of job quality across countries, demographic groups and over time, and analyse their determinants. In this reassessment of labour market performance — taking explicitly into account different dimensions of job quality in addition to the quantity of jobs — the project will use cross-country time series econometric techniques. These will be further complemented by in-depth micro-based analyses of job-quality dynamics that also allow consideration of individual’s and employer’s characteristics.



Assessing the effects of distribution of skills and key related institutional variables on multi-dimensional wellbeing outcomes


There is ample literature on how educational attainment relates to productivity at individual and aggregate levels. But the question for NAEC is a different one: How does the distribution of human talent combine with key institutional variables (e.g. education, social and labour market policies as well as labour force structure) to shape the multi-dimensional distribution of outcomes such as earnings, employment, or inclusive participation in social, civic, cultural and political life? With PIAAC, the OECD is in a unique position to provide answers to this. The particular value of PIAAC is that it provides for a multi-dimensional approach in which trade-offs between different outcomes and their determinants can be examined. The PIAAC data will generate new analytical work which was hitherto impossible.

As an example, results from PIAAC show that there is not just an important relationship between the level of talent in a country and the level of national income, but also that countries with a more unequal distribution of skills tend to have a more unequal distribution of income. Causality in this relationship may run both ways: Higher degrees of income inequality may cause unequal investment in skills. For example, some research suggests that the distribution of income can affect political, educational and economic mechanisms, among other factors, which can have an indirect effect on economic growth. Conversely, a more unequal skill distribution alongside other factors can contribute to a more unequal distribution of both economic and non-economic benefits. Classical human capital theory and research has led to better understanding of the contribution of skills to productivity and economic growth. But this new analysis will enable us to understand a much broader and multi-dimensional set of relations between skills distribution, various measures of wellbeing, and inclusive growth.



Do policies that increase GDP per capita also increase median income?


There is increasing recognition that GDP per capita falls short of accurately measuring living standards, wellbeing, and even the economic situation of a typical individual or household. For example, median household income has evolved quite differently from GDP in a number of countries. This project will examine whether structural policies that increase economic growth also improve median households’ disposable income. Data and resources permitting, the project will try to identify more precisely the differential effects of structural reforms on incomes of various population groups, providing evidence on the breadth and inclusiveness of growth-enhancing structural reforms. It will also assess the channels through which policies and institutions may influence disposable income across countries and over time by decomposing income into its main components, notably wages and self-employment income versus capital income.

The project will be empirical in nature and will rely on cross-country time series panel regressions. As dependent variables, it will make use of: (i) standard national accounts data on household disposable income per capita; (ii) new ‘extended’ national accounts data to be produced by STD that incorporate distributional aspects; and (iii) distribution data obtained from the aggregation of microeconomic administrative and survey-based sources as used e.g. in Divided We Stand. As explanatory variables, the analysis will make use of standard structural policies indicators as regularly used in Going for Growth (e.g. product and market regulation, level and structure of taxation, social benefits, and education) in association with various indicators of globalisation (e.g. trade and FDI exposure) and other structural features such as technological progress, supply of skilled labour, or employment of women.



Assessing the transitional costs and distributional consequences of structural reforms


Much of the planned work under NAEC on structural policies and inequality will shed light on the long-term effects of structural reforms on income distribution and identify trade-offs and synergies between policy levers. However structural reforms often take time to deliver benefits and generally involve substantial transformation with complex transition phases and transitional costs. For policy-makers it is essential to have a good understanding of these potential transition costs that are often concentrated on the most vulnerable. Failure to do so may reduce support for reforms and even jeopardise the reform process itself. This project will therefore complement the other components of the NAEC work on growth and inequality by using simulation tools – including a new generation of dynamic general equilibrium models – to simulate the short- and medium-term distributional effects of different structural policy packages. While these models have been criticised for their limits in macroeconomic forecasting, they provide a useful tool to simulate the impact of different types of structural reforms on a range of stylised economies characterised by different underlying institutional and policy settings.

The framework proposed would allow the study of not only distributive and aggregate steady-state effects of reforms, but also the characterisation of the full transition of each variable from the initial point where the reform is implemented to the new steady-state. The applied model makes it possible to evaluate overall reform desirability constructing aggregate welfare measures based not only on steady-state outcomes but also taking into account how the effects are displayed over time along the cross-section of workers. The proposed analysis will improve our ability to shed light on the distributional implications of structural reforms in the short and over the longer run. By simulating the dynamic effects of policy reforms, it will increase awareness of the policy interactions and possible short- and medium‑term trade-offs implied by such reforms. If resources permit, these simulations will also be complemented with a review of the distributional impact of selected key reform episodes in OECD countries.



Closing the loop: how inequality affects economic growth and social cohesion?


To better understand the growth-inequality nexus, it is also important to examine the effects that inequality and the associated lack of social mobility could have on long-term growth. While some theoretical studies suggest that there is not necessarily a trade-off between equity and efficiency, the empirical evidence is inconclusive on how inequality and the associated lack of social mobility affect long-term growth in both advanced and emerging economies. This project will thus examine the relationship between inequality, social mobility and economic growth in both advanced and emerging economies. This will provide key policy insights for policy makers to be able to identify win-win polices that promote both economic growth and fairer distribution of its benefits, as well as those that involve trade-offs.

The project will expand insights provided by the OECD publication Divided We Stand and recent work in the Economics Department (ECO Working Papers 924-930), and: (i) set out an operational framework for analysing the impact of inequality on the pace and pattern of economic growth; (ii) document the key dimensions of this interaction; (iii) look at the impact of inequality on the pace of economic growth and the sustainability of growth spells; (iv) untangle the relationship between innovation/technological change, changes in labour demand and in the distribution of wages; and (v) examine how different forms of inequality can undermine macroeconomic stability. The project will also explore the inequality-growth nexus stemming from the fact that poverty undermines investment in human capital and thus hinders social mobility. The aim of the project is to fully mainstream inequality into OECD analytical work.



Analysing growth and equality trade-offs in taxation


To further the OECD analysis of inequality, there is a need to examine how income (and wealth) can be most efficiently redistributed. Previous OECD work on Taxation and Economic Growth did not directly address inequality or inclusive growth. Although subsequent work has examined the tax policy implications of the rise in share of top incomes, there is a need to bring insights from these two strands together to examine the role of taxation in promoting inclusive growth. A first output could be a paper that examines at what type of progressivity/redistribution should governments be aiming to achieve through the tax benefit regime and outline where there are likely to be trade-offs between progressivity and tax incentives/exemptions. It would then consider how tax reform could in principle support both growth and redistribution.

This would set the stage for a second stage of work involving more empirical analysis (e.g. using micro-simulation modelling), since trade-offs in practice will depend on the shape of the (pre-tax) income distribution. This project will analyse the design of individual taxes as well as shifts in the composition of revenues from personal income taxes/social security contributions to consumption or property taxes in order to investigate how efficiency costs of redistribution can be minimised. More specifically, the project will analyse the design of measures to increase tax revenues consistent with achieving distributional objectives, investigate the redistribution produced by personal income taxes and social security contributions to inform analyses of the cost-effectiveness of tax measures, and investigate whether the design of some taxes could be improved to increase equality of opportunity.



Trade-offs and synergies between globalisation, innovation and inequality


The global dimensions of growth and inequality are also important, notably in the context of global value chains. When discussing the growth-inequality nexus in a globalised world, it is also important to examine new determinants of growth and inequality. Taking into account major global trends, this project will thus examine where value (in terms of employment) is being generated in global value chains (GVCs) through international trade. Previous OECD work on off-shoring has shown that a growing number of jobs are being created by trade in emerging economies, while other jobs are being created in advanced economies. At the same time, much of the value added generated in GVCs still accrues to advanced economies, due to their specialisation in high value added activities, but also due to multi-national enterprises’ orchestration of value chains and the compensation they receive from the knowledge-based assets that create value in these value chains. The underlying data infrastructure for the work on Trade in Value Added will also provide the basis for analysis of the carbon embodiment of international trade and production.

An additional, and particularly challenging step, will be to explore the creation and appropriation of income in the context of GVCs. Cross-country income flows that are embodied in value chains are affected by the tax planning strategies of multinational firms, where dividends, interest and royalty payments may be channelled through or held in other tax jurisdictions. While this extension is possible in theory, there are important methodological and data constraints which would need to be overcome, e.g. as regards the ownership of firms and capital. If these can be overcome, work would be undertaken in 2014 to make progress on this challenge. Finally, the project will aim to develop a new trade model that is explicitly able to take advantage of this new data to formulate policy advice.



Cost of Inaction and Resource scarcity: Consequences for long-term Economic Growth / Benefits of Action


Global economic growth over past decades has come at a significant cost to the environment. Natural assets have been and continue to be depleted, with the services they deliver already compromised by pollution. However, while most work in this area has examined the consequences of inaction to environmental challenges, the costs of inaction and the benefits of action has not yet been quantified. The Cost of Inaction and Resource Scarcity: Consequences for Long Term Economic Growth (CIRCLE)  project will therefore use economic scenarios to identify environmental pressures under different structural and environmental policy assumptions and the associated damages, and will then examine how these pressures may affect economic growth paths. In this endeavour, the project aims to assess the benefits of action to environmental challenges as well as the benefits of undertaking green growth paths. The analysis will be global, looking at the regional costs of inaction and benefits of environmental policy action for developed, emerging and developing economies.

Given the ambitious nature of this work, it is proposed to work in two parallel tracks. The first track focuses on the impacts and benefits of action on climate change and local air pollution and aims at getting the fully integrated analysis, i.e. have interactions between economy and environment in both directions, including a feedback from environmental damage to growth. The second track will include other environmental damages (e.g. from lost or impaired ecosystem services). The work will involve investments in the modelling frameworks used by the OECD. It will require new data and expertise, e.g. enhancing the representation of environmental pressures and resources use may require new data sets, and valuation of the economic consequences of environmental impacts and resource scarcity may demand additional expertise. The project will allow for improved growth projections that include feedbacks from the environment. Such improved projections can address some of the major systemic risks stemming from environmental degradation and resource scarcity. The proposed work should also enable modelling-based analyses at the OECD to better assess some of the net benefits of environmental policy action.



Environmental policies and economic performance


A good understanding of the relationship between environmental policies and economic growth is vital for policy-makers aiming to achieve greener growth. While OECD work has already examined linkages between structural policy and growth and between environmental policy and the environment, it has so far only partially analysed the cross effects of policies on growth and the environment. This project will therefore collect new indicators on policy settings and examine empirical evidence on cross-country differences in a wide range of environmental policies and analyse how these policies affect economic growth. This is not necessarily a story of trade-offs. Synergies may arise when environmental policies switch towards revenue-raising instruments that may finance growth-enhancing policies or when green growth boosts overall resources devoted to innovation.

The main contributions of the project will be to construct comparable cross-country measures of environmental policies and explore their effects on various measures of performance in a cross-country context. The methodological approach will draw on experiences with past work on the effects of anti-competitive market regulation and network sector regulation on growth and from work on environmental policies and innovation. It will rely on data gathering and indicator design, drawing largely on OECD experience in work with indicators (e.g. product market regulation and green growth indicators), and econometric analysis to assess the effects of environmental policies on productivity growth at firm, industry and economy level. Meta-analysis techniques will also be applied to heterogeneous micro-econometric studies of the effects of environmental regulation on selected measures of economic and financial performance (e.g. total factor productivity, return on assets, and return on investment).



Trade-offs and synergies between environment and inequality


Examining linkages between the environment and economic growth is insufficient, and more analysis is warranted on the distributional impacts (benefits and costs) associated with different environmental policies. One project will therefore provide quantitative insights into the equity impacts of green growth policies across households, sectors and regions. In doing so, the work will combine insights from the in-house forward-looking modelling framework with household level data on income and expenditures.

The global modelling tool at ENV (ENV-Linkages) will be expanded to improve the representation of different types of labour, and be coupled to a dedicated external module of representations of household income and expenditure data. With this enhancement, this project will provide quantitative insights into the equity impacts of green growth policies, across households, sectors and regions. The enhanced modelling framework could for instance be used to investigate to which extent market-based environmental policies, such as environmental taxes or emissions permit trading, that can contribute to growth objectives (e.g. fiscal consolidation and generating government revenues) are also consistent with equity goals. There may be scope to rebalance current consolidation efforts in favour of more equity and greening of the fiscal system. One of the major challenges in undertaking this analysis is the lack of reliable data on household expenditures for OECD countries. Resources permitting, the compilation of a database of information on household expenditures and income sources for different household groups will be undertaken.



Increasing the resilience of economies to exogenous shocks


The crisis has highlighted the high cost of economic instability. Against this background it is crucial to assess whether policies pursued with the aim of higher income growth expose the economy to greater instability with the concomitant risks. At the same time, policies to ensure greater stability may have implications for long-term growth.

This project will examine three dimensions. First, a large body of analysis has identified a number of structural policy settings as generally helpful to the aim of long-term income growth. However, much less is known about the effect of such policy settings on the resilience of economies to shocks. There is thus a need to draw on the experience provided by the crisis to see whether trade-offs exist between long-term growth and resilience and to consider potential remedies. Second, as with structural policies, macroeconomic policy settings generally considered to be helpful for long-term growth may also have negative side-effects for economic stability. For example, inflation targets involve trading-off some insurance against instability by allowing real interest rates to become negative in bad times against possible efficiency costs associated with positive inflation. Such issues can be illustrated and calibrated by means of model simulations. Third, pro-growth policies may also imply potential trade-offs with respect to stability in the international dimension. Further empirical work would trace out how pro-growth policy settings would affect external imbalances and identify cases where there are synergies between pro-growth and external sustainability policies as well as cases where the two are conflicting.



OECD@100: global trends and policy challenges


There is a need for a longer-term perspective on how major global trends will evolve and what challenges they are expected to pose to economic growth. These long-term trends include population ageing, technologies, change in skills, specialisation patterns, global value chains and the use of natural resources. This project will explore long-term growth scenarios and policy issues for the global economy over the next 50 years. In particular, it will examine how macroeconomic, structural and institutional policy choices interact to shape global growth prospects and other policy objectives. As such, the project will identify tensions, trade-offs and synergies and focus on how these change over time as a result of major global trends.

In comparison to previous scenario analysis, OECD@100 will evaluate outcomes in multiple dimensions (in terms of growth, equity, stability and the environment), when assessing scenarios and effects of public policies. The framework will also provide tools to better analyse interlinkages as well as the interdependencies among countries in the global economy in a consistent fashion. For example, while previous scenario work has highlighted the growth effects of increased human capital formation, OECD@100 aims to highlight its repercussions for specialisation, wage inequality and fiscal pressures in both the origin country and trade-partners. This strategy follows from the conviction that, in an increasingly interconnected world, anticipation and policy responsiveness can only be effective if mutual influences among policy areas and countries, within the OECD and with key non-OECD partners, are duly taken into account. Thus, the main purpose of the OECD@100 project is to provide a systematic and forward-looking perspective of policy interlinkages at the global level with a view of anticipating the build up of imbalances and tensions and identify policy responses. It aims at identifying future policy challenges facing the world economy in a compelling way and at discussing policies to cope with them while supporting gains in wellbeing that are widely shared and environmentally sustainable.

The framework for this project is built around three interconnected modules. The long-term macro module will be used to project growth and current account imbalances in OECD countries and non-OECD G20 countries until 2060. Outputs from this module will feed into the environmental module to develop projections for the implied use of energy and natural resources, environmental pressures, and eventually monetised damages. These damages may be fed back into the initial growth projections of the macro-module. Outputs from the macro module will also serve as input to a trade and inequality module to analyse future developments in skills, relative wages, trade and specialisation patterns, and value added distribution across countries. One of the new empirical findings from OECD work that will be taken on board in this project relates to trade specialisation. As such, we will examine the determinants of trade specialisation by looking at historical patterns and their consequences for economic growth. This modelling architecture will provide the basis for investigating how different configurations of structural, environmental and macro policies can affect future developments in the global economy.



Long-term scenarios for food and agriculture


The economic and commodity crisis of recent years have shown a lack of shared views about possible evolving paths of the agro-food systems and how policies can contribute to shape these paths. This project will fill this gap by developing long-term scenarios for global food and agriculture until 2050 to provide estimates of the likely range of resource challenges facing the global food system and to provide a platform to discuss shared and robust policy responses. Unlike similar efforts to date, the project emphasises the dialogue between relevant groups of scientists and policy makers as early as in the scenario definition phase. In a first workshop, specific scenarios towards 2050 would be jointly developed by modellers, experts, OECD and Key Partner policy makers and private stakeholders. This ensures that different but shared visions on possible futures of the agro-food system can be represented, and that views are shared on the challenges for global agriculture, natural resources, and food security – filling an important gap in existing scenario work. While based on key drivers and accounting the relevant interlinkages and trade-offs in the system and consistent with the other macroeconomic, productivity and environmental long run projects in NAEC, the scenarios would be oriented towards the expressed needs of decision makers.

A range of modelling groups including from other international organisations such as the FAO and IFPRI will generate quantitative scenarios to identify elements in the food system that are most sensitive to threats, as well as opportunities likely to develop over the coming decades. The project will focus on policies that improve the resilience and sustainability of the global food system. Policy and investment options will be subjected to multiple scenarios for agricultural markets, thereby allowing to assess robustness of policy responses. The outcomes of these scenarios will be discussed both across the modelling teams involved and stakeholders. The common understanding on possible futures, challenges and responses will facilitate policy dialogue and policy advice. A final policy report will highlight the implications and the characteristics of policies for improving the resilience and sustainability of the global food system. This work will incorporate three novelties relative to other scenario approaches: 1) having a varied set of models involved for a systematic identification of challenges; 2) including stakeholders’ views in the scenario design; and 3) providing policy advice that accounts for scenario uncertainties.



Ensuring productivity growth and innovation in the long run


In the long run, achieving stronger, more sustainable and inclusive growth, and increasing wellbeing, relies heavily on increases in the productivity of all factor inputs, most of which are finite. Productivity growth, in turn, relies on technological change and innovation, and on how new technologies (such as ICT, biotechnology, nanotechnology and others) are combined with other knowledge-based assets, such as skills and organisational change. However, despite large and growing investments in knowledge-based capital, productivity growth in many countries has slowed in recent years, raising questions on the adequacy of structural policy settings. At the same time, there is an urgent need for more rapid innovation (including its uptake and diffusion) in several key policy areas, such as in environmental policy.

To make progress on these questions and strengthen the underpinning of the OECD analytical frameworks on inclusive growth, three strands of work are proposed. First, the project would carry a prospective analysis of productivity growth, technological change and innovation at the frontier, based on a meta-analysis of studies on future prospects, including foresight and scenario studies. Then, the project would conduct a retrospective analysis of productivity growth and technological change for a limited number of frontier economies, to examine how waves of technological change have translated into productivity growth in the past. Finally, the project would encompass a micro-economic analysis of the determinants of productivity, technological change and innovation, including the role of knowledge-based capital, as well as the policy factors driving growth, extending work currently underway across the OECD. This work would have an explicit focus on frontier innovation, which determines the underlying rate of multifactor productivity growth.

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